26th January 2015
Syriza has obtained a strong victory in the Greek elections gaining more than 36% of votes – we highlight the expert reactions below…
Paras Anand, head of European equities at Fidelity Worldwide Investment
As largely expected, Syriza has emerged as the largest party in last night’s Greek Elections. Its mandate from the electorate is, in essence, to renegotiate the terms of membership with the Eurozone and free the economy from a seemingly endless period of contraction through restructuring its debt obligations. Whilst I would imagine that much will be made of a renewed threat to the euro project as a result of this outcome, I would argue that there are reasons to believe that the impact for European investors and even for economic growth across the region may be more modest than feared.
Potential for reform
With the serious prospect of victory looming, Syriza has repeatedly stated a desire to remain within the single currency. Whilst this is far from guaranteed, what will be potentially attractive to other member states will be the party’s determination to address vested interests and clamp down on corruption and the grey economy. In order to establish a stronger foundation, the Greek economy must move toward a broader base of tax revenue. This will only happen if a deep-seated culture of avoidance is addressed. The emphasis of key creditors within the Eurozone has already shifted from austerity to reform and Syriza may find greater support from the mainstream European parties than its ‘radical’ tag would suggest.
The election victory may be read as an indication that populist parties across the region will have the same success, compounding the threat to a ‘fragile’ currency union. I would challenge this observation. It is clear that Syriza’s core political agenda will fall way short of the ‘hopes’ of the more radical factions within the party. Also, the challenges facing the Greek economy remain uniquely challenging within the region. Whilst Greek borrowing costs rose substantially from the second half of last year, we have continued to see spreads tighten across most of the economies that were deemed to be vulnerable during the sovereign crisis.
Europe in a stronger position
Arguably at the forefront of most investors’ minds is the risk of contagion. The outcome of the Greek election is the latest but will certainly not be the last negative focal point for European commentators. It is, however, worth taking a step back and reflecting that the financial sector across Europe is in a significantly more robust position today than it was at the last ‘peak’ of the sovereign crisis in 2011.
Over the last few years we have seen the major financial institutions across the region rebuild capital, reduce cross-holdings and undergo a rigorous stress test which implies that the ability for the sector to absorb shock is now substantially greater.
That is not to say that tail risks within the Eurozone have evaporated entirely, it is just to emphasise that the degree to which localised issues have the capacity to materially and immediately alter the risk premium throughout the region has clearly reduced. To that end, it suggests that returns are more likely to be driven by fundamentals going forward to a greater extent than has been the case at various (sometimes extended) points over the last few years.
Rob Burnett, investment director & manager of the Neptune European Opportunities fund adds…
Syriza’s share of the vote in the Greek election was higher than expected at 36%, but just short of a complete majority. The party is likely to go into coalition with either The Independent Greeks or To Potami (The River). With Syriza having performed somewhat better than expected, what does this mean for Greece’s equity market? The instant reaction will likely be negative, but we believe this ought to prove to be a long-term buying opportunity for the patient investor.
As we have argued in the past, Syriza have no incentive to cause further turmoil in Greece. Greece has experienced a great depression – as extreme as the United States in the 1930s – with a 30% collapse in GDP. The US stockmarket fell over 80% from 1929 to 1932 and Greece’s equity market returns have been similar, if weaker, with a 90% decline that began in 2007.* Alexis Tspiras is taking power, with Greece having just registered its first quarter of GDP growth in 7 years. Tspiras is aware that he has a tremendous opportunity to gather the plaudits as the economy recovers. We expect Syriza’s negotiation with the Troika, comprising the ECB, the European Commission and the International Monetary Fund, will be difficult but all sides are incentivised to come up with a face-saving compromise.
Maria Paola Toschi, Global Market Strategist, J.P. Morgan Asset Management says:
Syriza has obtained a strong victory in the Greek elections gaining more than 36% of votes, well ahead of the prior government New Democracy (ND) party with 28%. However, with only 149 seats in parliament Mr. Tsipras, leader of Syriza, will now seek to form a coalition with the support of other minor parties.
The market reaction to the news was relatively muted despite the stronger showing by Syriza and the larger gap with the ND party. The euro initial fell to a new low of 1.10 against the US dollar but regained ground in early trading. Borrowing costs for peripheral economies fell across the board, while and European equity markets dropped.
Europe has less exposure to the Greek political turmoil compared to the last round of elections in 2012. The positive implications of the European Central Bank (ECB) announcement on quantitative easing (QE) has provided a cushion and is likely to remain the dominant market force.
That said, the sooner the new Greek coalition government is established and negotiations with the Troika can begin, the better for Greece, Europe and the markets.
Implications of the Syriza victory
Mr. Tsipras based his electoral campaign on redefining austerity measures imposed on Greece by the Troika and on renegotiating the terms of the country’s bailout programme. His party’s fiscally expansive policies contradict the current agreement with the Troika and potentially puts at risk the relationship with Europe as well as the much needed financial support that the country still requires. However, a Greek exit from the eurozone appears unlikely. Much rides on the negotiations Syriza’s attitude to honoring the current agreements. Markets could be in for a period of prolonged uncertainty as the negotiations progress.
The risk of significant contagion spreading in Europe or a run on the Greek banks is relatively limited. European institutions have introduced a plethora of measures to reduce the systemic risk in the single currency bloc and greatly reduce the threat of contagion across Europe. These include the targeted long term repayment operations (TLTROs), the outright monetary transaction (OMT) programme, the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM) as well as an effectively open ended QE programme.
The launch of the eurozone QE programme is expected not only to help increase inflation expectations in the region and add to positive momentum in economic growth but also reduce the risks that periphery bond markets could be exposed to a strong volatility. Despite these safer conditions there are still some risks related to an escalation of a political turmoil in Greece and a prolonged phase of negotiations. The search of a rapid compromise between the new Government and the Troika could be the best solution for Europe and for markets.
What does this mean for investors?
Market reaction has initially been muted as the strong showing of Syriza in opinion polls before election clearly foreshadowed the result and gave markets time to acclimatise. The biggest potential losers from the Greek election, and the extended period of uncertainty that markets may be in for, will be those that hold Greek assets, especially if Greek banks continue to face liquidity constrains as depositors take money out of the financial system.
Crucially to the outlook for investors is that the region is much stronger than it was back in 2012 – the last time investors were subject to the uncertainty of Greek elections. The extreme scenario of a Greek exit from the eurozone is unlikely but the uncertainties around the new Government in Greece and the re-negotiation of the bailout memorandum with the Troika will create volatility in markets. Investors should be wary of becoming too complacent about the possibility of Greece leaving the eurozone.
Political uncertainties will remain a headwind for European markets despite signs of a slowing improving economic situation. Europe could deliver on the upside this year as a weaker euro, falling energy costs and the low cost of household and corporate borrowing all add to the prospects for faster economic growth. However, investors should be mindful of the broader political tensions within the eurozone.