Greece-induced trauma: opportunity or not?

Tuesday, 30th June 2015 10:05 - by David Harbage

The current travails of Greece, and in particular the parlous state of its public finances, dominated market sentiment today. The FTSE100 fell by 2% to 6,620, while European bourses (both equity and bond markets) fell further and, on the foreign exchange market, the Euro currency lost ground. The question both traders and investors will be asking themselves is, "Does this setback provide a buying opportunity, or not?"

 'Long in the tooth' stock exchange commentators will be biased towards expecting a positive outcome, suggesting that a fudge or compromise solution is usually found in such high finance standoffs and is highly likely to be the case for this particular Greek tragedy. The writer would have sympathy for that view, recognising that the market often evidences a 'knee jerk' negative move in response to adverse news which often exceeds a fair response. Such over reactions are most prevalent when uncertainty or contagion appears probable. History indicates that usually such overblown fears subside and nifty traders take advantage of distressed prices, closing their positions when market volatility and valuations return to more normal levels.

 Will the so-called Grexit (Greece to leave the Euro) scenario 2015 prove to be another exaggerated, overhyped disaster? The fact that the Greek people will decide in an imminent referendum (with the incumbent political leadership urging for a No - to accepting the additional calls for austerity in return for additional funding from its Euro partners - vote) makes this a much more difficult call. Short term, things are likely to get worse for Greece, and the continent of Europe, before they get better. I expect markets to move further south as the news flow remains bleak with further negotiation with the Euro paymasters appearing unlikely and the media no doubt speculating about the continent's other highly indebted countries - in terms of "Who next?". In answer to that question, Greece is out on its own, notably in terms of relative public debt (to size of the country's gross domestic product: 177% in 2014), with Italy and Portugal next at 130%, followed by 100%+ levels applying in Ireland, Cyprus and Belgium. The UK sits midway in this particular league but, at 89%, this should not be viewed as respectable but rather a 'half empty' portion.

But, taking a medium term view, this commentator expects our domestic equity market to recover and so views the current weakness as an opportunity to buy oversold assets - albeit probably not immediately - for two prime reasons. One, being dispassionate, the impact on both the UK and global trade of an imploding Greece is minimal (economically, the 11million people of Greece contribute less than 0.4% of global output or GDP). Although the prospect of a greater focus by investors, as well as politicians, on Europe's weaker and indebted economies - as well as the purpose and merits of what was once known as the 'Common Market' - is likely to cast a shadow over the remainder of 2015 at least. Secondly, the current hiatus is likely to keep interest rates low - both on the Euro and also at home - reinforcing the relative attraction of UK company stocks which are yielding overall in excess of 3.5%, and whose dividend pay-outs (again overall, as reflected in indices such as the FTSE100) are set to be increased in 2015 and in 2016.

The emotive force of fear, as well as greed, can distort market prices and cause them to fall or rise much further than in more normal (if such a scenario exists) market conditions. When the tragedy or euphoria is over, investors can look back and pontificate on developments and the market's reaction to them in more dispassionate terms; probably indicating that their prognosis materialised and generally being 'wise with the benefit of hindsight'. However the more humble would recognise that often the margin between what is deemed a successful outcome or failure, via a more protracted or deeper problem, is very thin. Something that applies in both the macro-economic political world or to individual businesses.

 An example of the latter is in the 'near death' experiences of stock exchange listed industry leaders like Next, Thomas Cook and Taylor Woodrow. Difficult trading conditions and weak balance sheets had threatened their respective existences, with share prices of each being relegated into the sub10p 'penny share' category. Shareholders will have enjoyed strong performance over the past three years, perhaps blithely unaware of how close each company came to bankruptcy in the past. Having been a big proud company or nation in the past may be of little help when fresh problems arise, and it cannot be taken for granted that an entity is "too big to fail" because ultimately someone has to pick up the bill for restitution. Bigger companies than the aforementioned retailer, travel agent and builder have gone bust and, in similar vein, the finances and currency of larger economic nations than Greece have collapsed and required a painful 'bail out' solution.

Written by David Harbage 29 June 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.