Worried About Greece?
In my March column, “3 Investment Lessons from the Greek Fiasco,” I noted to expect more Greek drama this summer. And, drama we’ve had!
There is quite a bit of ‘collateral damage’ that can, and likely will, result from Greece not agreeing to bailout terms with Euro-area finance ministers. But most of that damage will be to the Greek economy and its citizens, and not to the global economy. Greek citizens should be enraged with their government in how they've been handling the bailout situation because it puts their livelihoods at risk. But again, these problems are domestic political issues, not global economic ones—and the latter are what matter to investors. If you’re fatigued with this story, you have every right to be. It’s been going on for years, yet the media still find ways to sensationalize its importance as though it may have an earth-shattering effect on capital markets. I just don’t see it that way at all. I first wrote about the story in January, and then again in March. Each time I arrived at the same conclusion: Greece would eventually buckle and accept a deal, remain in the euro, and everyone moves-on for a couple of months. I still think that will happen, but this is certainly the furthest Greece has pushed the envelope on their creditors and greater Europe. They are just plain playing with fire, but the deal and the bailout money is there if they want it. Their economic fate is on the line, but they can control it if they choose.
Greece’s Quandary - Fast Facts Whatever happens with Greece, I don’t think it will necessitate making any fundamental changes to your investment strategy (that is unless you’re heavily weighted to Greek sovereign debt, which I hope is not the case). For investors, the value of this story is in the soap opera details which make for interesting dinner party fodder, but not much else. Here are some interesting facts: • Greece is the first advanced economy to miss a payment on IMF debt. The only other two countries to miss before were Cuba and Zimbabwe - interesting company to keep. • The missed payment by Greece is the largest in the history of the IMF. • Countries that miss IMF payments are ineligible for further funds as long as they remain in arrears. • German Chancellor Angela Merkel sums up Europe’s opinion: “We’ll negotiate about absolutely nothing before the planned referendum is held.” • With regards to the bailout, Greece keeps trying to incrementally change discussion details giving some islands a discount on the value-added tax [VAT], meeting halfway on pension reforms, and slow implementation of fiscal reforms. The Euro-area finance ministers are no longer willing to compromise, period. • Greek Prime Minister Alex Tsipras submitted an “about face” acceptance to a two-year bailout plan, but he still tweaked some of the terms. It probably won’t fly with Europe. • Tsipras believes the “Grexit” would hurt Europe just as much as Greece, which he believes provides him leverage, but in my view he has miscalculated. • Tsipras has called for a July 5 referendum for Greek citizens to vote on whether to accept the terms of the bailout deal in a ‘yes’ or ‘no’ vote, but most citizens have no idea what they are voting for. • Greece’s economy has shrunk by over 25% in the last five years • Greece’s GDP makes up all of 0.39% of the world’s GDP The Bottom Line for Investors The last bullet above is perhaps the most important one—Greece makes up less than 1% of global GDP, so if it collapses even further it is still not likely to cause a ripple in global production. Which, by extension, means that global stocks can likely absorb whatever happens. The last two times I wrote about the Greece issue fears were running high, but the markets shrugged it off both times. It came with some volatility each time, and you should expect that again, but in the medium term don’t let it shake your positive outlook for stocks. Sensationalist news such as the current events in Greece cause investors to pull out of the market, usually often with regret. Should you pull out? Not necessarily—current events do not determine portfolio growth. Despite the fiasco in Greece, are we due for a market drop? How will the Fed Funds expected rise affect stocks, bonds, and our overall economy? What is the outlook for the rest of 2015? The results may be surprising. That's why I am making Zacks Market Outlook for July 2015 available to you today, with our compliments. A must read if you’re considering making portfolio adjustments in times of economic downturns and uprising.
Free Download: Zacks Market Outlook - July 2015
Best Regards, and Better Returns!
-Mitch
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