Managers Constructive on Europe, Despite Greek Crisis07.01.2015
David Zahn, head of European fixed income at Franklin Templeton fixed income group, said short-term volatility from the uncertainty over Greece presents opportunities but does not change the overall positive fundamentals in Europe.
At the weekend the Greek government unexpectedly proposed a public referendum on 5 July to vote on proposals from the country’s creditors – which led to the end of negotiations with the European Commission, the European Central Bank and the International Monetary Fund. Yesterday Greece defaulted on a €1.6bn repayment to the IMF.
Today Alexis Tsipras, the Greek Prime Minister sent a letter to the creditors saying he would accept their reforms, with some changes, in return for a third bailout. This has been rejected by Germany before the referendum.
Zahn said in a note: “The initial reaction of the markets to the surprise announcement of the referendum was, in our view, quite well contained and markets seem to have remained quite relaxed. We’ve not seen massive panic so far, which I think is constructive, although I would not be surprised if some of the riskier assets underperform until fundamentals reassert themselves.”
He added that even if Greece left the eurozone, it represents less than 2% the eurozone’s gross domestic product and firewalls have been put in place to try to minimise contagion.
The ECB also has tools it can use to keep the eurozone functioning properly – it could potentially bring forward some of the purchases in its quantitative easing programme; it could increase QE or intensify the schedule of Outright Monetary Transactions, which allows the central bank to buy government bonds from investors.
“We recognise that while there is short-term volatility stemming from the uncertainty over Greece, the situation does present opportunities for investors,” added Zahn. “There may be bargains to be found as corporate bonds are sold off on the back of some of the negative sentiment generally.”
However the willingness of the ECB to address potential problems, together with structural reforms in Spain and Italy, means that the fundamentals in Europe remain positive. “Over the long term, we believe opportunities should continue to emerge from Europe no matter how this situation finally plays out,” added Zahn.
Jeremy Schwartz, director of research at Wisdomtree wrote on the ETF issuers blog about his conversation with Alex Gurevich, former head of global macro trading at JPMorgan Chase.
Gurevich also believes that whether or not Greece stays in the euro will only have a moderate long-term economic impact, although it is hard to predict how markets will react.
“If we assume that most speculative money was already positioned defensively with respect to Greece, any resolution may come as a relief,” added Gurevich. “But let’s go to the next level. If the speculators anticipate the post-resolution relief rally in Greek bonds and stocks, they may actually not be positioned defensively”
Giordano Lombardo, chief executive and group chief investment officer of Italy’s Pioneer Investments, said in a note that although it is unclear what will be voted on this weekend, the Greek people will make the decision on whether to stay in the euro. He said: “We see a positive in this: a clear democratic mandate could help all stakeholders move forward without the political stalemates that have continually stalled the process.”
Lombardo stressed there is no reason for markets to panic as the Eurozone is much better prepared than four years ago, international direct exposure to Greek assets is relatively low and the ECB is ready to smooth excessive volatility as much as possible.
Pioneer’s multi-asset team thinks it is worth strongly considering keeping, and increasing, some form of protection on risk assets.
“They are still constructive on risky assets, especially equities, and we maintain a positive view on US dollar, but with geopolitical risks on the rise on different fronts (Greece, but also Middle East, IS, Russia) they suggest keeping some protection in place through hedging strategies,” added Lombardo.
Pioneer’s European fixed income team have suggested caution with exposure to Spanish and Italian government bonds which could suffer in the short term. Lombardo said: “However, we believe that both countries have made real progress in term of structural reforms that make them more resilient that in the past. Moreover, as highlighted above, the contagion should be limited also by the strong will of the ECB to do “whatever it takes” to preserve financial stability in the Eurozone.”
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