AS GREECE comes close to defaulting on its debts, the possibility of the nation becoming the first to leave the Eurozone has once again reared its head. This threat to Europe’s stability has wobbled markets and the Eurostoxx 50 has fallen 5 per cent over the last two weeks.
Unlike other market risks, such as interest rate rises or elections, the unprecedented nature of a Grexit makes the repercussions impossible to predict.
“The market environment is very much one where we know what the risks are, but we do not know what impact they will have,” explains Justin Oliver of Canaccord Genuity Wealth Management.
Although many market commentators have suggested Greece is coming close to leaving the currency union, some analysts expect the current situation to be on-going for many years to come. “They can spend a long time not exiting and they will pursue as many roads as possible [to that end],” says Peter Toogood of City Financial. He adds that leaving the Eurozone would be “too far and too much” for this tiny, troubled country right now.
Analysts are increasingly forecasting the possibility that Greece will default on its debt but stay within the currency bloc.
“If Greece does default, it is not a given they will have to leave the euro. People are putting two and two together and coming out with five,” says Oliver. “I think Greece will snatch victory from the jaws of defeat. Everyone wants them to stay in the Eurozone... They are playing a game of brinkmanship.”
But if Greece does leave, Oliver believes that, rather than causing chaos, there may be a sense of relief among investors because it will mean the removal of a multi-year thorn in Europe’s side. This could mean a rally in the region’s equity markets.
In the meantime, the European Central Bank’s QE programme is well underway and the euro, which had been stubbornly strong, has weakened considerably. Martin Todd, manager of the top-performing Hermes Sourcecap European Alpha fund, believes a Grexit alongside the ECB’s supportive measures will boost the region.
“Even with a Grexit, there is a lot going on that will benefit the market. Europe could strengthen from Greece leaving the Eurozone,” he says. “QE ought to be supportive of asset prices.”
Oliver has invested in a number of European funds but is remaining cautious – “we haven’t gone gung ho about it.” He has shares in the Baring German Growth trust, which is a play on the country’s exporters and should benefit from a weaker euro. “We thought those stocks had got left behind a bit,” he explains. He has also invested in JOHCM Continental Europe and the Edinburgh Partners European Opportunities fund.
Todd’s fund is tilted towards companies which have undertaken restructuring and will be able to grow in an improved Eurozone economy. Car company Renault has gone in to partnership with Nissan and has streamlined its business with new manufacturing processes. “Up until 1998, sales were going gangbusters so it didn’t have to think about how it could grow the business... But when sales dropped off it realised it could not rely just on sales to grow,” Todd explains.