Fears that Greece will exit the eurozone have been blown out of proportion by the media and have overshadowed much graver potential headwinds, according to Schroders’ James Sym. 
The fund manager (pictured), who recently celebrated his three-year anniversary on the Schroder European Alpha Income fund, is more concerned about the impending Spanish election than he is the current Greek crisis, which has dominated headlines since the start of the year.
“In Europe there’s always something to worry about and today we’re all worried about Greece,” he said.
“I take a three-year view with my funds and I think I can find stocks with maybe 50 to 100 per cent upside, so I can double people’s money in some of the stocks I own. I don’t get them all right but that’s what I’m batting for and if I just constantly worry about what’s on the front page of the FT or any other esteemed publication then I would never invest.”
Performance of indices over 6yrs
Source: FE Analytics
The impact a Greek exit, or a ‘Grexit’, would have is unknown as it would be the first country ever to leave the eurozone. While Sym is certain that there would be a brief bout of volatility in the market, he points out that Greece alone accounts for a mere 8 per cent of European GDP.
“It’s because it’s the ‘issue du jour’ that people are so worried about it,” the manager explained.
“If a Grexit were on the cards, it would be horrible the day it happened but once Greece is out the euro, it will be very competitive. We’ll all be going on holiday to Greece because it will be 50 per cent cheaper than going to Spain. Tourism and agriculture are two of the biggest parts of their economy.”
“A lot of people are saying that the euro is not forever now that Greece could leave, but I do think it is a unique situation. Ireland had a problem with terrible banks that they had to nationalise, Spain was spending far too much money and had a construction boom, Italy didn’t have those things but it had too much debt. Greece had everything. Each peripheral country had a problem but Greece had all of the problems that each country had, and there’s no tax collections.”
Portugal, Italy, Ireland, Greece and Spain, collectively known as the PIIGS, are the five countries that were considered economically weakest following the financial crisis of 2008. Because these countries use the euro, their governments were unable to employ independent monetary policy to help strengthen their economies.
Performance of indices over 8yrs
Source: FE Analytics
Out of these countries, Sym says Greece poses far less of a threat than Spain as he is worried that the ‘Syriza-style’ Podemos party could be elected into power during the country’s 2015 general election, which will be held on or before 20 December.
Many investors, including Sym, are worried that if Greece was to be given an attractive deal, politicians in other countries with large debts could come under pressure to also test the limits of the eurozone, thus creating a number of countries that will expect similar treatment and place added strain on the economy.
Sym’s fear is that the Podemos party would be one of the first parties to brave an exit from the eurozone.
“Political contagion is the risk, but Greece defaulting and leaving the euro of its own volition would be incredibly painful,” he said.
“Ballpark, Greece’s currency would halve overnight, so everyone in Greece would be 50 per cent poorer than they are today. It would be brutal to say the least.”
“Do you think, if you’re part of the Spanish electorate, you would see that on the TV and vote the left-wing equivalent in Spain? I think that is definitely not what you would do.”
“So, if Greece defaults and leaves the euro in a very painful way, that’s very good for political stability in Spain I would argue, because it’s proving what the mainstream politicians have always argued is correct – they have no choice, they have to [stay in the eurozone].”
“If Greece were to get a good deal from Merkel and are given loads of debt relief, then Spain, Italy, Ireland would be totally justified in putting their hands up and saying, ‘we want the same’.”
Despite this being a potential risk, Sym believes that any concerns about Greece’s debt being unsustainable are misguided.
He says Greece has the potential to grow at 4 per cent this year due to a large output gap that has been created through unemployment. The manager says that this could lead to very quick levels of growth similar to what Spain is experiencing at the moment.
“Greece has managed to create this idea that its debt to GDP is so clearly unsustainable, and it’s very high – it’s 180 per cent debt to GDP,” the manager said.
“From an economic perspective it’s not true that Greece’s debt is unsustainable. If they choose not to pay that back it’s a policy choice, not an economic inevitability. It’s a total misconception in the market. Even European finance ministers say ‘yes of course at some point we need to restructure the debt’, well actually we don’t, we’ve done that already and we did that in 2012.”
As such, Sym says that there are pockets of the Greek market that could look attractive at the moment due to cheap valuations and exaggerated pessimism from investors, governments and the media.
While the Schroder European Alpha Income fund doesn’t hold any Greek stocks at the moment, this could change. “We’ve got nothing in Greece and in fact it’s now an emerging market so it’s out of my index, but I could still hold it,” Sym said.
“If there’s a deal, I could be tempted – I’ve got my eye on a couple of stocks. One bank and one telecom [company]. It would be a small position, but there’s definitely potential there.”
Since Sym took the helm, the fund has produced a total return of 37.07 per cent, outperforming its sector average and benchmark by 16.48 and 14.7 percentage points respectively.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
Schroder European Alpha Income has a clean ongoing charges figure (OCF) of 0.94 per cent and yields 3.32 per cent.