6th July 2015
Jason Hollands, managing director of Tilney Bestinvest, looks at what events in Greece mean for market sentiment…
Yesterday’s “no” vote in Greece, rejecting the terms of an already expired bailout package, places Greece firmly at the epicentre of market attention today. Most European leaders, and certainly creditors, will have hoped for a “yes” vote that would possibly have seen the collapse of the belligerent Syriza government.
In backing the position of its anti-austerity Government, the Greek public have presented Europe’s politicians and creditors with a conundrum. While it is clear that some European leaders are sympathetic to the plight of the Greek’s and want to avoid cutting Greece lose from the Eurozone at all costs, the Eurozone is a supposedly a rules based system, so if its politicians and institutions bend the rules for Greece, it opens up a Pandora’s Box, strengthening the case for anti-austerity movements in other Eurozone member nations that could unravel the Eurozone over time. The views of the Greek electorate as expressed yesterday are therefore important, but so too are the views of voters in more fiscally prudent nations such as Germany.
How the coming days play out are clearly critical for the solvency of Greece and to a large degree the credibility of European institutions. Much will depend on how the Greek government approaches further discussions: its prospects for dialogue with creditors will have been marginally improved by the resignation of its confrontational finance minister Yanis Varoufakis. As we all know, Greece has almost run out of cash and without a functioning banking system, businesses will fold as they cannot replenish inventory and the state will not be able to pay employees, so without an injection of liquidity from the ECB, Greece faces a total meltdown.
From our point of view, the key question is what does this mean for UK-based investors?
Of course Greece is a small economy within the Eurozone and represents a tiny proportion of European stock markets, with most of the European funds we rate holding no direct exposure to Greece whatsoever. The ECB and other institutions have also put in place various mechanisms in recent years that provide lines of defence, including QE and the Outright Monetary Transaction programme. The direct impact of the Greek crisis is therefore theoretically limited and was at least partially priced in. The real issue here is however one of market sentiment, and whether the Greek debt crisis translates into a broader bearish narrative.
We’ve been of the view for some time that there has been too much complacency in markets. Investors have benefitted from ultra-loose conventional and extraordinary monetary policy, which have certainly been supportive of asset prices, propelling bond and equity valuations ever higher, with the US equity market looking particularly expensive at over 26x earnings on cyclically adjusted PE basis.
The latest phase in the Greek debt crisis will undoubtedly provoke market further volatility. When combined with the aggressive sell-off in Chinese equities (which fell 16% last week alone, even after the People’s Bank of China cut interest rates) and growing expectations of US rate rises, these risk combining into a more generalised swathe of bearish sentiment that ricochets around the globe as institutional investors and traders move to take further risk off the table.
It is important for investors with a long-term outlook to avoid getting swept up in short term market volatility as traders react to events. Indeed, should the current volatility descend into a more sustained correction this might prove a buying opportunity for long-term investors. Given the likelihood of the ECB needing to pull out all the stops to prevent contagion through its ongoing asset purchase programme, we think that a sell-off in European equities would be particularly worth exploring for further investment. Funds we like include Threadneedle European Select as a core fund, Standard Life European Equity Income for those wishing to draw a yield and F&C European Small Cap ex UK for a fund with a greater exposure to “domestic” Europe and with a value-style bias.
We believe that the UK shares will be affected but the small and mid-cap less so than the blue chips. Investors with a diversified portfolio should not be overly concerned; some may even see this as an opportunity to buy at lower levels.