Grimbo... aka Greece in limbo

Monday, 6th July 2015 09:46 - by David Harbage

The Greek people may not appreciate what their No vote at today's referendum is likely to mean - for the country's public finances, economy and base currency - but they certainly backed their prime minister in rejecting the further austere terms demanded by the Eurozone for continued financial support. The people's demand for independence is natural, but whether this strengthens the hand of Greece's negotiators is an arguable assertion and a financial solution looks as far away as ever. Politicians across Europe will meet with central bankers this week to firstly, try and thrash out a means of propping up Greece's dire public finances (and retain the Euro as its currency) and secondly to consider the implications of a Greek default and departure on their own economies.

As intimated last week, things appear set to get worse before they get better (especially for the Greek economy) and the lack of clarity on the way forward is set to depress sentiment towards the Euro, bonds in the weaker countries of the continent and equity markets across the board.

In such an environment of uncertainty, investors will reappraise their appetite for risk and typically anticipate slower economic activity (as businesses' confidence to invest in new projects and private individuals propensity to spend is restrained) and therefore lower returns from corporates.

A likely consequence of Grimbo (Greece in limbo) is for nervous private investors to 'draw their horns in' by selling smaller, more speculative investments as they choose to focus on larger businesses operating in more defensive business activities, with stronger market positions and balance sheets. In anticipation of heightened fear, but not accompanied by higher volumes of trade, market makers will often protect their own financial positions by widening the range or spread between the bid & offer (the price at which shares can be sold & bought) on smaller companies. Because larger companies are more liquid and can be traded, bearish investors will often sell these in the first instance. Certainly the FTSE100 index has fallen a lot further than the more highly valued FTSE250 universe of companies over the past month, and many of our larger businesses currently appear oversold and good value in relative terms.

The writer continues to believe that the current setback for UK listed company shares will represent a good buying opportunity, taking the appropriate longer term perspective, and would commend investors who 'drip feed' monies - either via monthly savings schemes, annually by using the Individual Savings Account (ISA) allowance or when reinvesting accumulated dividend income - into the stock market, as a means of mitigating the risk of buying at the top.

In response to requests, the following provides a view on how the current tax year's ISA subscription of £15,240 could be invested; a bias towards higher yielding shares (to capture the more reliable portion of a company share's anticipated return - sheltering the income, rather than potential capital gain, from the tax man) and collectives which offer something beyond the mega cap constituents of the FTSE100 index:

1. Place £11,000 into a low cost tracking fund: i shares FTSE100 or, if keen to follow the fortunes of individual stocks, invest the sum equally between 8 industry leaders (£1,375 each) such as: Aviva, Berkeley Group, GlaxoSmithKline, HSBC, Imperial Group, National Grid, Royal Dutch Shell and Vodafone which will provide exposure to life assurance, house building, pharmaceuticals, banking, tobacco, electricity, oil & gas and the telecommunications sector. With the exception of London-focused Berkeley, the other selections are international businesses.

2. Place the balance of circa £4,200 between 3 investment trusts (whose underlying asset worth exceeds their share price) to gain exposure to medium and smaller sized firms (which tend to be more flexible, grow more rapidly, and have greater exposure to our domestic economy, than the FTSE100 giants): JP Morgan Mid Cap (seeks to outperform the FTSE250 index), Aberforth Smaller Companies (invests in smaller premium listed shares, with a bias to owning lowly valued - by reference to earnings, assets or balance sheet - companies, and Henderson Smaller Companies (shares the same benchmark as Aberforth, but has a bias towards growth industries and is not constrained to fully listed shares, will also own AIM stocks).

By contrast with trading activity conducted elsewhere, the prudent investor can view their ISA investment as a long term foundation which should require low maintenance. As such, selecting collective investments or a diversified list of high quality blue chip company shares may be a favourite strategy within these tax shelters. If individuals have yet to utilise their allowance in the current year, opening an ISA and placing monies there in readiness for a rebound in stock market sentiment and valuations makes sense.

Written by David Harbage 6 July 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.