Greece is unlikely to affect European equities, according to an expert.
“Our base case remains that a bailout will happen particularly given overnight progress of the Greek parliamentary approval. The next step will be for the parliaments of the creditor countries across Europe to approve the bailout package. Were we to see a worst case in the deal not happening, we would remain positive on the outlook for European equities for the following reasons despite expecting near term volatility given the recent strength in markets,” Rajesh Tanna, Chief Financial Adviser at J.P. Morgan Private Bank, said.
“Greece contributes less than 2% to European GDP and as such will not derail the economic recovery the region is currently enjoying. Very little Greek government debt is held outside of public institutions such as the ECB and IMF. As such, any negative impact from a bankruptcy of Greece wouldn’t affect the European banking sector. We would expect the contagion risk to be contained given both the credibility of and also the monetary tools the ECB has at its disposal. In the event of a “Grexit”, we would expect the ECB to announce a special plan in addition to quantitative easing designed to directly purchase government debt of other Southern European countries.”
“We still believe the outlook for European equities remains positive. We expect profit growth after a four year absence helped by Euro weakness driving better profits for Europe’s multinational business (overseas revenues versus domestic cost bases) and also helping their competitive position. The falling oil price helping the region as the Eurozone is an oil importer and in particularly helping the consumer through an increase in disposable income. Quantitative easing driving asset rotation out of fixed income into high dividend yielding and high quality equities and the euro fell more than 1 percent as the Greek deal renewed focus on the prospect that the U.S. Federal Reserve might hike interest rates in September. What should FX investors be careful about in their long term strategies?
“We believe the largest portion of the Euro weakness is behind us given the very large move from a peak of 1.40 versus the US dollar. This said, further weakness cannot be ruled out particularly if the US interest rates begin to rise as expected later this year. For US dollar based investors, who are particularly conscious or worried about this risk, we would suggest hedging at least some of their FX exposure when investing into Europe.
“The best case scenario for us would be that Greece remains in the Euro and that this most recent crisis is used as a base from which to increase political integration in Europe and also put Greece on a sustainable path to recovery. The latter would probably require some additional fiscal support for example through infrastructure investment. Greece will also ultimately require some form of debt relief.
“Whilst volatility would likely increase, we do not see a significant impact on the fundamentals for Europe and its companies so would thus see any market weakness as a buying opportunity. For Greece, an exit would mean significant economic weakness, more likely a large depression.”