The Greek question?

The Greek question

We don’t often talk about the specific’s around your investment’s, as in the main we let the fund managers do their jobs and we monitor them behind the scenes.

However when something that is global news comes up that may affect you we like you to know we are on top of it and keeping you right up to date.

In light of the evolving situation in Greece I spoke a couple of our investment partners so we could let you know their thoughts and hopefully alley any fears you may have.

As you will see this has been such a long time coming that our investment managers and the wider UK economy has unwound itself from any great exposure to Greece.

This doesn’t not mean that we won’t be affected by market volatility but the wider risks to the UK and the EU largely built in already.

First up you can find out the view from America on Greece, and other issues here in Russell Investments Week In Review video series.

Closer to home this is what 2 of our other investment partners are saying.

Hector Kilpatrick, Chief Investment Officer, Cornelian

‘We have been defensively positioned since April, when we reduced our equity and private equity positions materially. The reason for the more conservative asset allocation has been equity valuations (which were beginning to look stretched) as well as concerns about the outlook for both the US and Chinese economies. These concerns remain valid today and so we do not anticipate adding risk in the near term.

We believe that, whatever the outcome concerning possible Greek debt default, the issue will be contained. Should Greece leave the Eurozone, the ECB will be highly motivated to show backing for other periphery countries and this could aid their economic recoveries if it includes more aggressive buying of their outstanding debt which would reduce financing costs.

We remain content with our exposure to European equities and note that some of this exposure is currency hedged. The European economic cycle has started to improve and we do not believe that the Greek situation will seriously derail this dynamic.

In order for us to derisk further, we would have to believe that the global profits down cycle had significantly further to run; or that US interest rates would have to rise significantly from current levels and at a pace which would surprise investors. Both scenarios are feasible, however the evidence for either outcome is far from conclusive. More supportive of risk assets would be the anticipation of further quantitative easing in the US, which again cannot be ruled out but is unlikely in the short term.’

Gary Laing, Associate Investment Director, Investec Wealth

Clearly, Greece is occupying most of the headlines. Over the weekend Mr Tsipras took brinkmanship over the edge. Having pushed Europe & the International Monetary Fund (IMF) into offering a “take it or leave it” deal on Friday, he both ducked the issue and attempted to gain greater leverage by calling a referendum for July 5th on the proposal, rubbing salt into the wound by recommending that the Greek people should vote “no”.

In doing so, Mr Tsipras has almost certainly overplayed his hand. The European Union (EU) immediately ruled-out further talks and the European Central Bank (ECB) withheld an increase in liquidity support for Greek banks. This has necessitated Greece imposing capital controls. Greek banks will be closed today and for the next six days, with maximum of €60 withdrawals per day allowable. 

The stock market will also be closed this week. With Greece almost certain now to default on its debt to the IMF and with Angela Merkel publicly describing the referendum as a no more and no less than a vote for the Euro, or for the Drachma, there is a real prospect of Greece leaving the Euro. Since recent polls have suggested that the Greek people want to keep the Euro, it is highly probable that Syriza will face calling a General Election in the wake of a defeat.

Our investment perspective: we have never ruled-out Greece leaving the Euro. Our position has been simply that unlike in 2011/12, this would not be a systemic. The Greek economy is immaterial in size and unlike the situation in 2012, the transmission mechanisms do not exist for material contagion, whether or not it leaves the Euro-Zone. Private sector cross border financial exposure is vastly reduced and what remains fully identified and discounted. Furthermore, the banks are now also healthily capitalised, so any losses that do occur will not suddenly become a source of instability to counterparties. The key point is that a rise in fear/uncertainty may cause significant temporary volatility in peripheral sovereign bond yields, but this will not last long enough or be great enough to derail Europe’s growth recovery.

As you know this is a rapidly evolving situation but these are the most up to date comments possible.

I hope you find this useful and enjoy the rest of your week.

Please leave any feedback at the usual place.

Adrian Murphy
Partner