Greek election may fail to provide market certainty – Barclays Wealth
Markets are being held hostage by the upcoming June 17 Greek elections, according to a recent report by Barclays Wealth.
The latest report in Barclays’ monthly publication, Compass, states that any ambiguity over the way in which the vote is presented could cause even more confusion amid what is already a very turbulent time for the markets. The Barclays Tactical Allocation Committee has also reduced weightings in developed stocks and high-yield credit in favour of cash and core government bonds.
Kevin Gardiner, head of Investment Strategy of Europe, Middle East and Asia at Barclays said: “Markets have again been taken hostage. The Greek election itself is too close to call, and further volatility seems very likely. If the vote is not presented as a single issue referendum on Euro membership on 17 June it may be difficult to disentangle that issue from the various parties’ claims and counter claims about jobs and living standards. The europhile Greek electorate could inadvertently push itself out of the euro by voting again to reject ‘austerity’ – thereby, ironically, doing more damage to the credibility of the single currency project than has been done by those who say they don’t want it.”
Gardiner also points to global and capital markets continuing to ‘muddle through’, even if the Greeks exit the eurozone, provided the ECB, IMF and Euro area politicians continue to offer support to the system, and to the Spanish and Italian banks in particular, while absorbing losses on its holdings in Greece.
Barclays estimate that euro area official sector exposure to Greece, through its direct lending, EFSF loans and the euro system itself, is of the order of €300bn, or roughly 3% of euro area GDP.
However, after allowing for financial reserves and other buffers, they think that in practice, the increase in aggregate euro area government indebtedness might be more muted, at around 1% of GDP, even at low recovery rates. Much more important than the direct impact of a Greek exit – which Gardiner sees as possible and not yet probable – is the likely contagion risk to Spain and Italy that would follow. He thinks the risk could be containable: the dominoes do not have to fall.
Gardiner continued: “Against the background of this ongoing mix of heightened policy risk and fragile economic growth, the only safe call thus seems to be that markets will remain skittish during the weeks ahead. The key investment question is the extent to which we try to fine-tune investor portfolios to try to dodge that volatility. Because we still see both the euro area banking system and the global economy avoiding disaster, and because stock and bond valuations are already reflecting a lot of potential bad news, we think there is a very good chance of a sharp rebound in risk assets at some stage – but it is quite possible that such a rebound will start from lower levels than today’s.
The possibility of taking avoiding action is not limited to multi-asset portfolios. While we expect the euro to remain intact – with or without Greece – we still see some further weakening in its value as one of the safety valves for the financial markets. Investors who wish to actively manage their exposure to euro area risk can do this tactically by using the foreign exchange markets, and focusing on currencies that outperform as that risk rises.”