The Greek tragedy opened a new act over the weekend, and although our base case remains that Greece will remain in the currency union, the lack of a resolution will create volatile markets.
We believe staying invested in Eurozone equities through this period will prove the correct path, and we maintain our overweight position in Eurozone equities. Over our six-month investment horizon, ECB action should mitigate contagion effects to other markets or economies in case of a Greek exit. In our base case, investors should see a sell-off in European equities around this referendum as a buying opportunity.
What's happened?
1. Greek Prime Minister Alexis Tsipras announced that the country will hold a referendum on July 5 on whether to accept the terms of a bailout offered by creditors.
2. Eurozone finance ministers will not extend the bailout program, set to expire on June 30, through to next week’s referendum.
3. The European Central Bank has indicated it will continue to provide Emergency Liquidity Assistance to the Greek banks, but not beyond current levels.
4. The Greek government has said it will impose a bank holiday.
What to watch now?
The next major milestone will be June 30, the date when the bailout package officially expires, and the date when a €1.5bn debt payment to the IMF is due.
In the absence of an agreement or a change of course by the European Central Bank, the bank holiday will likely need to extend for the whole week.
Our base case is that Greece will not make the IMF payment, and that the creditors will not extend the bailout. However, we will be watching announcements closely. An outside possibility remains that Greece could make the payment to the IMF by tapping emergency cash reserves.
The next milestone after this will be the referendum on July 5.
Our base case at this stage is that the electorate will vote 'yes' in favor of the creditors - a scenario even the Greek government sees as most likely. In this event, we would likely see a period of confusion – after all the deal being voted on would have, by then, expired, and the credibility of the Greek government would be under question, given that they are campaigning for a 'no' vote. That said, a 'yes' vote could encourage creditors to provide some short-term leeway.
If the electorate votes 'no,' this would likely mean no further support from the creditors. With no funding, the banks would almost certainly need to remain closed, and Greece would embark on a painful road toward an exit from the currency area.
What are the market implications?
In the days ahead, market volatility is likely to be high. The Eurostoxx50 rallied by 5% last week on hopes that a deal was approaching, and the weekend's events could lead to some or all of that unwinding. Bond markets, in particular in corporate credit, will temporarily become less liquid in the upcoming period of high uncertainty, which should result in higher risk premiums. The euro has opened down -1.3% against the US dollar in early Monday trading.
Investors should see a sell-off in European equities around this referendum as a buying opportunity, all else in the global macroeconomic environment remaining equal. At this stage it is too early to identify potential opportunities in the bond markets, but these may arise as events unfold in the coming days and weeks.
First, the European Central Bank has both the tools and the determination to restore calm to financial markets. In its statement released Sunday, it stated that "the Governing Council is closely monitoring situation and potential implications for monetary policy stance." We believe this is a clear indication that it stands ready to act forcefully in the event of a sharp rise in borrowing costs of Spain, Italy and Portugal. Earlier this month the European Court of Justice upheld the central bank’s ability to buy bonds in potentially unlimited quantities.
Second, we note that the response from other central banks, such as the Fed, could be strong too. New York Federal Reserve president William Dudley described Greece as a “huge wild card,” in a Sunday interview with the Financial Times. A dollar surge sparked by a Greek exit could delay the first Fed rate rise beyond September, or potentially into 2016.
Third, direct financial and trade links to Greece are relatively small. This means that even an economic collapse in Greece should not have a material negative impact on the remainder of the euro area, provided financial contagion is contained. Economic sentiment would likely be affected negatively in case of an exit. But the policy response should ensure that the fallout would be relatively manageable over our investment horizon of six months.
Fourth, the Eurozone is in a stronger economic position than it has been in in many years. Bank lending and consumer spending have both been picking up, leading to an improved growth outlook. For the first time in four years there have been more earnings upgrades than downgrades over the first quarter of this year. We have even seen solid structural reforms in Spain and Ireland, along with early signs of progress in Italy. What's more, leading indicators in the Eurozone suggest strengthening economic fundamentals, which means a larger cushion against potential shocks.
Fifth, the Eurozone outlook should also be assisted by recent indications of a pick-up in US growth. Meanwhile, the weekend's interest rate cut by the People’s Bank of China, will also likely support the Chinese economy and add to global liquidity.
Ultimately, based on the current situation, we believe remaining invested in Eurozone equities through this volatile period will be rewarded. We will continue to monitor the situation closely and deliver updates at key milestones.
Kind Regards,
Mark Haefele
Global Chief Investment Officer
Keine Kommentare:
Kommentar veröffentlichen