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Eurozone Dropout

History is littered with numerous great thinkers of the Hellenic republic, everyday life relies on many concepts born from this small nation. Geometry, democracy, cartography and the Olympics for a start. The name marathon comes from the story of a Greek soldier running from Marathon to Athens to deliver news of a military victory over a Persian army.  

A nation so much on the front-foot is now on the front page once again.   

The same week we hear news that the BBC has lost the rights to the Olympics, what has been a Marathon has surpassed most people’s expectations (even by European standards) but it does now really feel like we may be onto the sprint finish. 

So, just in case you don’t know, here is where we are up to. Following the breakdown of talks between Greece and its creditors last Friday we have seen the Greek Government call a referendum on bail out conditions, the European Central Bank (ECB) stating its intentions of not increasing credit to Greek banks, capital controls imposed and the closure of Greek banks and stock exchange.

The polls in Greece suggest that the majority of Greeks want to stay in the Euro so, as the referendum is being painted by the ECB as an in-out decision, it is expected that the result will be a yes. The bailout has not been extended so the Greek population could be voting on a deal that may not even exist. Even if it is yes, it could be too little too late. 

The Eurostoxx 50 led a broad decline in equity markets on Monday falling  over 4% on the day. Our portfolios held up better including our fixed interest portfolio that gained 8 basis points on the day.

Here are just a few of the views coming from the fixed interest managers over the past day or so:

Ariel Bezalel of Jupiter:

‘Ultimately, our belief is that at less than 2% of eurozone GDP and with much of Greece’s debt held by the public sector (c.76%) the fallout should be fairly well contained in the event of “Grexit”. We do not see this as a Lehman moment.’

‘A sell-off in peripheral government bonds (such as in Spain, Italy and Portugal) could lead to more aggressive intervention by the European Central Bank (ECB) to keep a ceiling on yields.’

The fund has not changed it’s approach and maintains a sizeable position in medium and long dated triple A rated issues and have been buying credit on days of weakness on Grexit fears. With a view that contagion would spread through the banking system, the funds exposure is limited to the UK banking system where the exposure to Greece is, in their opinion, immaterial. 

Mark Holman of TwentyFour doesn’t think this is a time to panic:

‘in fact it is more likely to present an opportunity to add cash to fixed interest markets at compelling levels given the backdrop of ultra-low interest rates and demand for income.’

‘What we do have though is a highly uncertain and fluid situation, for which there has been no precedent. This naturally causes risk aversion, but it is not necessary to predict the worst possible outcome. We do think that Greece will ultimately enter into a technical default, whether it is because of an unfortunate trigger this week or in the weeks ahead as there is some form of debt relief put into place after a “yes” vote. However, the losses of that default will be very closely contained either within Greece or within the public sector. The types of contagion spoken about in Q3-2011 just do not exist anymore and banks are far better capitalised to deal with situations such as this. Even if there is a “no” vote, this does not necessarily mean that Greece will leave the Euro, and even if they did, would it be in a hurry?’

TwentyFour are maintaining higher cash levels than usual and looking to take advantage of forced selling and illiquidity. Potential headline events that could offer opportunities are missing the IMF payment, EFSF default or public unrest due to capital controls.  Although they expect a “yes” vote they will maintain further cash in the instance of a “no” vote.

I think it’s fair to say they are treading carefully but are also relatively optimistic on the final outcome regardless of a potential Grexit with references that the current banking system is far more capable of coping than it was in 2008.  The fund managers are positioning their investments to protect the fund and to take advantage of the expected volatility in markets over the coming days and weeks.

At Equilibrium we are also holding firm with our investment plan and, following the news over the weekend, we have already deployed some of the tactical cash in the portfolios by buying an equity tracker. The FTSE 100 fell below a 6,600 trigger level which signalled the purchase and which was made at about 6,580.  Not resting on this, we are also planning to use the proceeds from a future property reduction to take advantage of increased volatility by striking a new defined return product. 

We will continue to monitor markets, using capital from defensive and uncorrelated assets to fund further top ups in equity should markets continue to fall.

As for Greece, Syriza have misinterpreted the shapes and put it to a vote which could lead to the maps being rewritten and I think Tsipras is probably for the high jump.

Note - This article is for information purposes only and does not constitute advice. Investments can fall as well as risk and you may not get back your full investment.