Euro debt crisis: should investors prepare for a Greek exit?
As the euro crisis sends the stock market tumbling, investment experts remain surprisingly upbeat about equities.
Investors have been told that Greece leaving the euro will not be a disaster
By Paul Farrow
The Sunday Telegraph
Sunday 27 May 2012
The chances of Greece exiting the euro intensified last week - so much so that EU leaders were warned to have contingency measures in place.
Such was the demand for safe-haven assets that investors rushed to snap up German bonds that paid a coupon of 0pc. That's right, investors piled in to buy government bonds that will not deliver a return but are deemed among the eurozone's safest assets. ......
It has been a tortuous few days - headlines of Armageddon and the death of equities will have caused anxiety among investors. They will be asking themselves whether they should be preparing their portfolios for an exit too.
It is certainly a worrying time. The FTSE has fallen from its March high of 5,966 to below 5,300 in a matter of weeks and with official figures published last week showing that Britain's double-dip is worse than first thought, alarm bells will be ringing in the ears of many an investor.
Yet, many private client managers, stockbrokers and financial advisers remain remarkably sanguine. Given the uncertainty that has prevailed in markets ever since Lehman Brothers went to the wall, it is understandable that they have got used to it - and the last thing they want is for their clients to panic. ......
There are several reasons why experts are urging investors to hold firm.
First, shares are cheap - valuations are at levels not seen since 1980. ......
Second, the euro zone accounts for only around 10pc of the overall market value of global stock markets.
And this leads to a third reason: the US - and companies that thrive on US demand - will prosper.
The US recovery is surprising analysts on the upside. It is a point that Alan Steel, a Scottish-based financial adviser, is keen to make. He highlights that US exports to the rest of the world are up 57pc over the past three years; that US property prices are increasing in most areas of America over the past year by 25pc; and that "our transatlantic cousins" find themselves sitting on the world's cheapest natural gas reserves, which will have a huge impact on their economic future.
Mr Steel said: "Ned Davis Research statistics looking at extremes of pessimism and optimism back to 1996 showing every peak in either extreme has been 100pc wrong. In other words, when investors should buy, they sell, and vice versa."
The divided opinion leaves investors in a quandary. If Greece leaves the euro it will inevitably lead to share price falls but this will open up a buying opportunity. ......
However, if a solution is found and Greece remains in the euro, the market will rally so investors moving lock, stock and barrel into cash will miss out. It is why the overriding message to investors is not to panic and to step aside from horror stories of Armageddon. They need to take stock of their situation and act according to their financial circumstances and goals, experts said.
How to play the uncertainty ......
We canvassed the opinions of investment banks, stockbrokers, private client investment managers and financial advisers on how they would play the uncertainty. Here is what they said. ......
Alan Steel at Alan Steel Asset Management: "Long-term sovereign bond yields such as US treasuries or UK gilts are at the end of a 30-year bull market. What that means in old money is there's hardly any room to fall further. Ask any expert in this area and they'll tell you, looking out 10 years, they would expect yields to be at least back to 5pc. That's double where they are now. So those thinking of piling into these bonds now could suffer horrendous losses shortly. Meanwhile, high-quality equities are cheap and good value. The cheapest places to be, where all the bargains are, are in equities." ......
Quote courtesy of The Sunday Telegraph
Sunday 27 May 2012