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Despite Greek Turmoil, Investors Favor United Europe

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The minute-to-minute news regarding Greece has had market participants glued to their screens and terminals, with no clear idea on what will finally transpire.

It’s a situation that’s reminiscent of the summer of 2012, when the Eurozone crisis had reached its zenith. And yet, despite the rapidly changing headlines and a Greek exit from the Eurozone now more of a reality than ever before, financial markets have remained calm and relatively unchanged. Investors, it seems, are of the mindset that many things have changed in Europe since 2012, and those changes will protect the system from the kinds of shocks that ripped it apart three years ago. Here’s what a few fund managers have to say:

David Spika, Global Investment Strategist, GuideStone Funds:

“The level of uncertainty is definitely high but the good news is that the markets haven’t reacted in a way that would indicate real concern. U.S. and European equity and bond markets, as well as the peripheral markets of Portugal, Italy and Spain are not selling off as they would have if investors were anticipating some sort of crisis.

And though volatility has picked up, it seems to be more of an opportunity for investors to sell and reposition, rather than a “let’s head for the exit and rethink our investment strategies” situation. Also, gold prices would have gone up if there were a major crisis, and they haven’t.

We think this is because things are different now than they were in the second quarter of 2012. Today, the U.S. and European economies are much stronger than they were and the European Central Bank (ECB) is acting in a much stronger way than before than before. The ECB has big back stops in place with quantitative easing (QE) and other measures, and more importantly, most of Greece’s debt is no longer in the hands of banks. We’ve known since January that there would be a line in the sand, so this isn’t a sudden shock like the Lehman Brothers failure was. If we were to see a major change, then it would have to be a situation where the consensus would believe that something would happen with the European Union that would cause global instability. But even the likelihood of Greece leaving the euro is not leading to over reaction in the market, and we’re not seeing anyone extrapolate that to Spain, Portugal, Italy and Ireland. The economies of Spain and Ireland have, in fact, done very well, largely because the very aggressive QE plan has done a lot to improve the financial conditions of those markets.” Paul O’Connor, Head of Multi-Asset Team, Henderson Global Investors:

“No one really expected a NO vote in the Greek referendum, so that came as quite a surprise. And now, a lot of investment bank strategists are saying that a “Grexit” is 70% to 80%, but the way the markets are reacting shows that investors believe there’s a lower probability of that happening and even if it does, it won’t be so cataclysmic because it will be managed in such a way that it will be contained.  

The equity flows into Europe have barely stalled, in fact, over the last few weeks, and data shows that investors have been buying on the dip mode. I would be concerned, of course, if we get a more adverse outcome and if it isn’t priced in as yet, but if we get a well managed outcome, I think the market will be fine.

For us, the July 20 deadline, when Greece has to pay E3.5 billion to the ECB, is important. They’re going to need a bailout for that and if that can be done – it seems that they will find a way to work around it – then Europe will go on. The market hasn’t priced in major systemic risk, but we are in a totally different situation than in 2012, with positive GDP numbers and an ECB that has a much stronger crisis-fighting tool box. So if there’s an agreement and markets are told not to worry about Greece for the next few months, I think we’ll even see a rally.”

Ben Rozin, Senior Analyst and Portfolio Manager, Manning & Napier: “From our point of view, the likelihood of both economic and financial contagion from Greece is low. Greece is just 2% of Eurozone GDP, so while exports to Greece will be hit and there’ll be some slowdown in Eurozone growth, the revisions to European GDP won’t be so great in the larger scheme of things. Most banks in the Eurozone have gotten out of Greek debt – only the IMF and the ECB have exposure to it now, and the ECB’s balance sheet is strong enough that they can pay for any losses from the Greek situation. We also believe that the ECB stands to provide lender of last resort support if needed.

For us, that means the biggest risk out there is political contagion. The actions of the Greeks in the referendum have created a precedent that you can vote on something and take that back to Europe, and there are some nationalist parties that are throwing their support behind Syriza. Elections in Spain are coming up soon and there is a policy platform in a Spanish party that is similar, so whatever happens in Greece will benefit them. This is why negotiations are so tricky because if Europeans give way too much on this, they will send a message saying it’s okay to thumb your nose at Europe and the ECB and have prolonged negotiations, and of course, the politicians don’t want this. There is also the potential for a humanitarian crisis in Greece, which politicians would want to avoid, too.”