29th June 2015
As Greece continues to dominate the headlines, here are the thoughts of Mark Holman, CEO of TwentyFour Asset Management:
Since late Friday night, when Greek PM Tsipras announced that he would hold a referendum for the people of Greece to vote either for or against accepting the offer put forward by the Greek creditors, the news headlines have been dominated by little else. Given that a snap referendum, which effectively brings the latest impasse ‘to a head’ is a potentially worse situation than most market participants expected, it is understandable to see risk markets in the red today. However the moves seen so far are far short of catastrophic because the market has had a long time to prepare for these potential risks from Greece and most portfolios have already adjusted.
Syriza said that their reasoning for walking out of the bailout talks on Friday was because it would have been impossible to get the current Greek parliament to vote through the package as offered. Note: Syriza leads a coalition and has a number of internal factions which have become fragmented. One of the key sticking points is that the creditor package did not include any debt relief for Greece. This is a valid point because Greece is totally unable to meet their obligations, and without debt relief there is a high chance of default anyway. Syriza also mention the complete lack of growth friendly measures. Importantly though, Syriza are saying that if the referendum returns a “yes” to accept the package, then due to their commitment to democracy they will implement the package, even if it means reconfiguring the government. These are all good points, however the lack of diplomacy in the way that Tsipras has alienated many of his Eurozone colleagues means patching-up with them will not be easy.
Today, Jean Claude Junker, President of the European Commission, made a speech detailing the situation from an EU perspective, essentially pushing the “yes” vote by trying to make the Greek people see exactly what was being offered to them by the creditors. Junker went as far as to say that he felt “betrayed” by Tsipras for walking out. It appears that the Greeks walked out on talks even before the final offer was made to them, and in fact they did include several compromises that Syriza had requested, and they would have discussed debt relief and growth packages once the broader austerity measures had been agreed. He reiterated (as has virtually every politician we can think of this morning) that he wants to keep Greece in the Euro, in fact he went on to say that there was no plan contemplated for Greece to leave.
Listening to both sides it seems incredible that so called professional diplomats could have reached such an impasse. It does sound as though that Syriza potentially had no option but to consult its people, they just went about it in their usual amateurish manner. Meanwhile the ECB has capped ELA and therefore the banks are closed, as is the stock market, until July 7th and the Greeks are facing punitive capital controls. This was something that they definitely did not sign up for when they voted for Syriza in January and may well affect the voting on Sunday!
There are a number of technicalities that will be faced this week, but in reality the risk that we need to determine is what question will the referendum address, how will the people vote, and what extraordinary measures may happen along the way to ensure that there is minimal contagion.
We would start by repeating our view from two weeks ago and that ‘this is not 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. It is also worth reiterating that Greece is just 1.8% of EU GDP and 0.4% of global GDP, and we think contagion of a Greek default into the rest of the Eurozone periphery will be limited by a far stronger economic situation in the rest of Europe, close harmony among the rest of the Eurogroup, as well as contagion fighting tools put in place by the ECB. In fact before markets had opened this morning we had already heard from Mario Draghi that the ECB would be closely monitoring events and would use all available tools if required, and then from Spanish Finance Minister Luis De Guindos that Spanish GDP was ticking along at close to 4% currently. These are soothing words for anyone contemplating “shorting” other peripherals such as Spain for example.
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?
To us, this all points to a situation which markets will recover from and will recover quite quickly due to the stronger fundamentals and the very supportive technical position that the market has built up ahead of this event.
How do we time it? Now this is the tricky part as markets are relatively cheap, and when they turn it will be very hard to deploy the cash balances that investors have accumulated. We can’t rule out that the parties will resume their discussions before the referendum, but given the difficulty of passing a deal through the Greek parliament, a referendum does look likely to happen as planned on 5th July. So maybe it is best to wait until Monday and hope for a “no” vote to get into the market cheaper? However, polls have shown that, by some margin, the Greek people want to stay in the Euro and will accept the creditors deal; even Syriza acknowledges that the possibility of a “yes” vote is quite high. The truth is that this situation has the possibility of changing at any time and timing the bottom is going to be nigh on impossible.
Our tactic will be to try and take advantage of forced selling and illiquidity when it presents itself and be cognisant of some of the potential trigger headlines which may push markets down temporarily. For example missing the IMF payment, the potential to trigger an EFSF default, the potential for scenes of unrest as capital controls take their toll etc. However, some firepower must be kept back for next week too in case we do have that “no” vote and what could happen as a consequence, as it is here that the likely low point would be.
For the moment though, despite the price action today, our hedges remain intact and cash levels high...but this can change very quickly as the situation unfolds.
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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mark's views are his own and do not constitute financial advice.