All Eyes on Greece
In a referendum conducted over the weekend, Greek voters rejected the proposed bailout terms which call for additional austerity measures on the Greek Economy.
Several questions arise: What are the implications of this vote? Will Greece be forced out of the euro-zone? What course of action will the ECB take? What about the IMF and the other members of the European Union? The situation remains fluid, and while there is still a chance for a last second deal, we believe the likelihood of a Grexit (Greek exit) has increased.
Crisis has been brewing for so long that policy makers and financial markets should not be caught by surprise. So far initial responses in the markets have been fairly muted. European equities are falling between 1-3%, the Euro dropped to $1.10, and safe haven government bond yields have only fallen a few basis points. One of the bigger casualties is oil which dropped over 5%. That said we believe volatility in the markets, in the event of a near term Grexit, will remain elevated.
In the Case of a Grexit, what is the Spillover Risk?
We believe spillover risks are limited. European officials have indicated their commitment to preserving the integrity and stability of the Euro Zone and that firewalls have been put in place to prevent contagion. Private sector exposure has decreased and Greece’s main creditors are official institutions and governments. In addition, Greece accounts for only 0.3% of world GDP and Greek exports to the EU as a whole last year represent just 1.5% of US GDP last year . Nonetheless, there are reasons to remain cautious. Bonds of some other highly indebted peripheral economies continue to be vulnerable since their yields are at low levels and there might be a re-pricing of risk. We think that European equities will also suffer initially. One positive is that we expect the Euro to remain low which helps support expectations for economic growth in the area.
contact a member of the Withum Wealth Management group.
At current levels, we believe Greece’s debt burden is simply unsustainable without substantial fresh capital from international creditors or a Grexit. Remaining in the Euro zone means more years of tough austerity measures (higher taxes, pension cuts) and an economy mired in recession and high unemployment. In the long run, exiting the Euro might be the lesser of two evils. A return to the Drachma and subsequent devaluation could boost competitiveness in the Greek economy. Either way, the Greeks have a tough road ahead.
So What Now?
We believe that the international arena will remain fragile and volatile. While so far US markets have remained resilient and the economy continues to improve, the uncertainty regarding the first rate hike by the Federal Reserve could also increase volatility in the near term. We continue to advocate a disciplined investment approach that is consistent with long term goals, time horizon and risk tolerance. We share the view of Joe Davis, Vanguard’s chief economist when he states:” Periodic flare-ups in the markets are not unusual in the course of a year. However, with economies growing slowly and the great financial crisis still fresh in many investors’ minds, market reactions to world events tend to be more sensitive. Staying calm and disciplined in a volatile market can be hard, but keeping a broadly diversified and balanced portfolio can help investors stay on track to meet their long-term goals.”[1] Capital Economics – Global Economics Chart Book
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM Advisory Group, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM Advisory Group, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a PWM Advisory Group, LLC client, please remember to contact PWM Advisory Group, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the PWM Advisory Group, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.
