29 Jun To Hellas and Back
The past few weeks have again proven that we can be certain of very little in the world. The human tragedy behind scenes witnessed in Tunisia has once again shown that geo-political and security risks do remain at the forefront and our thoughts go out to those affected, however, the weekend has also brought global financial matters sharply into focus.
Back in January, we wrote about the Greek election, Syriza’s victory and its leader Alexis Tsipras, who was elected with a very clear mandate to protect against the swingeing austerity measures proposed for Greece by its international creditors. At the time European Commission head Jean-Claude Juncker was on record as saying “The European Commission stands ready to continue assisting Greece”, although this willingness to support seems in danger of drying up following the weekend’s events.
With Greece due to repay 1.6bn Euros to the IMF tomorrow, which almost certainly will not happen, the Government’s call for a referendum on 5th July to assess the population’s appetite for their creditors proposal on the continuation of the bailout programme would appear to have poured oil on already troubled waters. Thus it would appear matters have suddenly become very serious indeed.
The referendum call in particular is a curious position for Syriza to take. Whilst creditors are calling for government expenditure cuts, the government is proposing additional taxation and other revenue raising measures in return, which Creditors are very much of the opinion won’t quite do the job, even if those increased taxes are ever collected. The additional delays associated with a referendum do not help the situation.
So the weekend saw an impasse that has now led to the closure of Greek banks and capital controls to the extent that ATM withdrawals have been limited to 60 Euros per day, much lower than the 300 Euros limit that was instigated in Cyprus during their crisis. This is clearly a sensible course of action aimed at stopping the flow of deposits and stabilising the banking system and whilst this does raise the economic stakes for Greece, it does not necessarily lead to the conclusion of a full default and a withdrawal from the Euro.
Many commentators have suggested that, whilst extremely painful for the Greek population in the short term, at least a withdrawal from the Eurozone would allow the government to devalue their currency and take control without the oversight of demanding international creditors. That said, it would appear that the majority of the population do in fact want to remain in the Euro, even if that means having to accept the austerity and structural reforms demanded, leading some to suggest a change of government is more likely that an exit from currency union.
It has been argued that the pain experienced by a Greek exit, might actually reinforce the European currency union as those in Spain and Italy would be suitably chastened in witnessing the situation in Greece and therefore attempt to avoid a similar fate at all costs.
There remain many unanswered questions. What we do know is that Markets do not like this uncertainty one iota. Asian markets reacted badly overnight and European markets are down sharply this morning. The UK has taken a more measured view, with the FTSE down 1.7% at the time of writing, but French and German markets suffering up to 4% declines at the time of writing.
We cannot, and will not, make any proclamations on the future of Greece as a member of the Eurozone, however, we can say that until, and probably beyond, any resolution we will continue to see further volatility. It would not surprise us here at CDC if we are continuing to comment and consider the Greek financial position for some years to come.
What we must focus on however is fundamentals for investment markets around the world. The Eurozone area is our largest trading partner and therefore instability in that region does have an impact on the outlook for UK corporates. However, Greece makes up such a small percentage of that, we must not lose focus on the healthy position of not only UK but also very many European companies.
As you may know, we do not tend to take overtly geographically-specific decisions within our portfolios, but it is worthy of comment that we have approximately 35-40% of our international equity exposure in Europe and we would expect that our fund managers will use any periods of weakness to strengthen their positions in Europe where value appears. We must not forget that the European Central Bank has begun a huge Quantitative-Easing (QE) programme and as we have seen in other countries, when this occurs, risk assets, such as equities can be rerated significantly.
Banks across Europe are now much less exposed to Greece than they once were, with balance sheets stress tested and bolstered where necessary. Additionally, other Southern European countries are in much better shape and with the large QE programme, the ECB is also better placed to contain ongoing market volatility, so “contagion” is less of a worry.
Turning back to the impact on our portfolios. We have worked hard to understand the way in which our portfolios behave during times of increased volatility and have designed them specifically to be resilient and able to withstand the worst of the headwinds. That said, clearly any investment portfolio will experience some buffeting through such turbulent times but we must, and do, remain focused on achieving positive returns for our clients over the longer term. The important thing for CDC and its investment strategy is making sure our asset mix can deliver this long term value and this means blanking out the short term “noise” when necessary.