Over the past few weeks, the main question I have been asked is what will happen to the markets if Greece leaves the EU or not?
Last week, markets paid lip service to Greek negotiations but, at the end of the day, it was other factors that moved prices. The dollar was strong, bond markets fell and equities continued to trade in a volatile but directionless way.
Beneath the headlines, economic news on both sides of the Atlantic continued to accumulate in the positive column with lower energy prices feeding through to profitability and, as a result, a willingness to pay higher wages.
Top line revenue growth is now coming into sight for companies closely associated with consumers, which is a nice change after years of cost cutting.
As news of yet another version of the Greek deal rolled out, the immediate consensus was that the plan lacked any connection to reality. It seemed unlikely that higher taxes would be collected and that the compromise would satisfy neither the Greek parliament nor creditors, including the IMF which is a bit short of cash at the moment because the Americans haven’t paid their subs. Yet, for 24 hours, investors, as measured by indices and commentators, seemed persuaded.
Following decisions by both sides over the weekend, the banking system and stock market have now closed down which is bad news for all concerned.
A grand agreement may yet be delivered but, at street level, rational decisions are being made which have resulted in a mass exodus of deposits from Greek banks, the absence of credit to domestic businesses at a rate of interest less than 10% and, most tellingly, the closure of small and medium-sized businesses which are the cornerstone of the economy.
According to the FT, every day this year 59 companies have closed, 617 jobs have been lost and Greek GDP has fallen by €22 million. Unless there is major structural reform, which typically only happens after ‘the bust’, nothing will change.
Memories of Iceland in 2008 spring to mind, when the credit crunch hurricane hit an over-indebted small country. The story that circulated at the time, which I am sure was entirely apocryphal, was that the world’s bankers turned up in Reykjavik to ask for their money back only to be told that there wasn’t any cash, but “we do have plenty of fish”.
Non-market participants often make the mistake that real world events drive prices. To an extent this is true, but, in the short term, the most influential factor is the flow of money.
Between 2003 and 2007, the most popular hedge fund strategy was market neutral. It worked and, as confidence grew, the amount of money committed to this area increased as did leverage and complacency.
By August 2007, many of the large hedge funds were similarly positioned and so when sentiment shifted and a few investors placed redemption orders, the selloff became self-reinforcing.
Market neutral funds lost 35% in a month even though indices hardly moved. The point made was that popular investment strategies, particularly those thought to be low risk, can be particularly dangerous when the time comes to head for the exit. Leaving early might be uncomfortable, but second out is nowhere.
At the time of writing this, Greece has nine hours left before defaulting on its €1.6 billion interest payment. The headlines tomorrow will be completely different and commentators, gurus and the likes will once more make their opinions known.
For me, it is as simple as asking the people of Greece as to their preference. In saying that, I believe they had, in fact, voted in a government that was given its voice and mandate to no further austerity measures – only for that government to prefer to waste more time and return the voice back to its citizens. This all seems like a no-win situation with the main losers being the Greek people.
Whenever you decide to invest in the markets, it is imperative that you do so with experienced fund managers. These people have their fingers on the pulse of what is taking place in the world and are constantly re-positioning their portfolios to gain growth and preserve wealth. When times are volatile this is ‘key’.
By Robert Mancera
Robert Mancera is GM/Director at Blacktower Financial Management (International) Ltd with offices in Quinta do Lago and Cascais.
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