Uncertainty remains over Greece say fund managers 

Shanny Basar

Russ Koesterich, global chief investment strategist at BlackRock, said the global economy and markets are unlikely to be affected by uncertainty over the execution of the deal between Greece and its creditors.

Yesterday Greece struck a potential deal to remain in the Euro after agreeing a third bailout of $86bn from the Eurozone in return for imposing tough austerity measures. In addition the European Stability Mechanism will provide an immediate €10bn to recapitalize the Greek banking system and a €50bn asset fund will be created for privatization commitments. Half of this fund will also be used to prop up Greek banks.

Koesterich said in a blog: “While markets cheered the deal, uncertainty remains. The deal contains several onerous provisions and reforms still need to be approved by the Greek Parliament and then implemented.”

The Greek parliament has to approve the full agreement and start legislating to implement the first actions by tomorrow, when a Eurogroup call will be held. The board of governors of the ESM and the Eurogroup then need to agree to the ESM starting formal negotiations, which could then last several weeks.

Koesterich added that the global economy and markets are still on the same trajectory as  in early 2015 as even when a Greek exit from the Eurozone looked likely, bond markets in Italy, Spain and Portugal did not suffer large losses.

”Turmoil overseas hasn’t changed the underlying fundamentals that have shaped markets for some time now: slow but steady growth, low interest rates, low inflation, a strong dollar and a Federal Reserve that is likely to start raising rates by year’s end,” he said.

During the rest of this year BlackRock expects investors to focus on US interest rates rising before the end of 2015 and on investment opportunities outside the US.

“At BlackRock, we continue to believe that international markets (notably Japan and Europe) look poised for outperformance,” added Koesterich. “Even in the event of a “Greek exit,” the European Central Bank possesses the necessary tool kit to manage any contagion to other European countries.”

The economic outlook and strategic analysis team at Candriam Investors Group said in a report that, in the short term, the execution risks of the Greek deal remain elevated as many hurdles still need to be overcome. The implementation of the required austerity measures and reforms is uncertain and Greece’s debt-to-GDP ratio remains unsustainable.

“However, even if the agreed plan is passed by the Greek parliament, a possible Grexit will remain Greece’s Sword of Damocles in the coming years,” added Candriam.

Candriam decided to maintain a slight overweight in equities, in combination with a protective derivatives strategy.

“From a regional point of view we are maintaining our tactical hedge on Euro zone equities, that not only allows us to benefit from the market rebound, but also protects us in case of a U-turn in negotiations,” said Candriam. “We are maintaining our exposure to the USD, which we consider a good hedge against the Greek tail risk.”

Martin Harvey, fund manager at Threadneedle International, said in a blog that while the short term risks of Grexit have declined, the risk that the Greek population begins to question the merits of euro membership must be increasing.

“The implication for markets has been unclear through much of this saga, as investors have found it difficult to assess the direct costs or benefits of the different scenarios,” Harvey added. “Following months of indecision and reasons to be cautious, it is perhaps unsurprising to see a stark positive reaction to what is a “deal” full of pitfalls and contradictions.”

At Morningstar, Robert Johnson, director of economic analysis and Roland Czerniawski, markets research analyst, said in a report that  the situation in China is much more worrisome than Greece.

The Chinese government restricted share sales after the Shanghai index fell by nearly 30% from its highs in the spring, even though the market is still up over 70% from a year ago.

“What’s got me worried is that the government continues to believe it can manipulate the stock market at will,” said Johnson. “However, even the Chinese government cannot fight the laws of gravity over the long term, and short-term manipulation can only make the inevitable crash to earth worse than it otherwise might have been.”

Featured image by Jamdesign/Dollar Photo Club

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