Investment implications of a Greece exit
As this goes to press it looks like Greece will stay in the Eurozone, but if it does exit we believe contagion will be limited to a short term hit to confidence and growth. The rest of the Eurozone is in far better shape now than in 2010-12, in terms of the growth, budget deficits and bank lending.
In addition, the ECB now has the tools in place to support both banks and governments which will help break the negative feedback loop between the two that we witnessed in 2011 and 2012. Three quarters of Greek debt is held by official institutions, and European banks are better capitalised than they were a few years ago.
Greece represents about 0.25% of world GDP, which is roughly the same as New Zealand’s share, so it should not have much impact on global growth by itself. However, growth and confidence in Europe is still quite fragile so there is a risk recent positive momentum will be lost as business and household ‘animal spirits’ take a hit once again.
The Eurozone will be the epicentre of any market fallout if Greece does exit the Eurozone but the ripples will be felt across the world. Under this scenario, we should expect share markets to decline and core bond yields (US, Germany, Japan) to rally. Spanish and Italian government bond yields will rise but nowhere near the levels we saw a few years ago.
The US dollar (USD) should also rally in a Greece exit event which implies the NZD/ USD should decline. After an initial fall the euro currency could actually rally if Greece exits the Eurozone as the Eurozone would be potentially stronger without Greece.
Given our view that a Greece exit would not be a global systemic event, any material correction in share markets would represent an opportunity to add risk. Equity risk premiums are above long term averages and a move lower in both equity prices and bond yields would further raise expected returns from equities over bonds.
We think an overweight to cash is a prudent strategy at present. There is not much value in bonds at current yields and if Greece does not exit the Eurozone, core yields will likely rise. In contrast, cash is a defensive asset in most scenarios and can be deployed quickly as opportunities present themselves.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act).
An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice.
While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate,
complete or timely and do not make any warranties or representations in respect of results gained from its use.
The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP.
These views are subject to change depending on market conditions and other factors.
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