Greece and its possible exit from the euro is the dominant theme on the financial markets: costs, contagion to other countries, the recession, the "flee" of deposits from banks considered more vulnerable, and more. This event is given as "possible", if not "probable", by many analysts (the rating agency Standard & Poor's assigns the event a 30% probability, Nomura 50%).
Advise Only has already talked about economic costs of Grexit, but what could be the effects on the different classes of financial assets? Far from wanting to make predictions, we have studied an analysis of the Bank of America (BAC), which speaks precisely of the impact on the financial markets of a Greek exit from the euro.
It is well known that markets tend to anticipate, move on expectations and hypotheses, for which many adjustment movements and portfolio preparations in view of a Grexit have already been carried out.
Zero or even negative yields on the German bond market, American rates at all-time lows, heavily negative Swiss rates, are just some of the effects of the so-called “risk off”, the search for zero risk, protection and the will to conserve one's assets in the event of a "catastrophe". However, risk cannot be looked at only from one perspective: what appears to be "risk-free" in one scenario could, on the contrary, prove to be particularly painful in other circumstances. The composition of a portfolio must therefore be carried out by assigning probabilities to the various events and balancing the risks of the various scenarios.
Advise Only has for some time been developing a series of portfolios that have the objective of protect personal savings at this moment of great uncertainty markets and the European debt crisis. Will the euro collapse and return to the lira? Will the two-speed euro be born and will Italy be in Serie B? The Advise Only SIM advisory team identified three possible scenarios for the Eurozone crisis and then identified three “Anti-crisis” investment portfolios, one for each scenario. Find out more by reading "How to invest in times of crisis?".
To evaluate the effects of a Greek exit, it is naturally necessary to distinguish between the initial market reaction andadjustment subsequent to the reactions of the Authorities and Institutions.
The economists of Bank of America in their analysis they speak of three channels of contagion on the markets:
- escape from deposits: in Greece and in the other peripherals resulting liquidity crisis of banks;
- difficulty of funding: for the European banking system (as a whole we might add) and for solvency risks (many Greek companies, which would be prevented from accessing foreign capital, could go into default and prove insolvent in their payments);
- reduction of exposure to government bonds of countries considered "at risk" and subsequent increase in spreads, further contagion on the bond markets of Spain and Italy.
Obviously each of the three events would require sudden action by the authorities, the European Central Bank primarily, For example:
- recapitalization of banks at European level
- unlimited liquidity from the European Central Bank for the banking system
- restoration of the purchase of government bonds through the SMP program (Security Market Program) by the ECB
- strengthening ofESM to contain the contagion to other countries.
Unfortunately, at least at present, I can hardly imagine an "orderly" exit of Greece from the euro but in any case, if it were to happen, it would be a trauma!
The day after the release you could accentuate the trends and the movements already taking place on the financial markets Europeans.
- Falling official rates, and possible tensions on theEuribor (as has already happened during the Lehman Brothers Crisis).
- Waist and German bonds at all-time highs in price and at low yields (BAC talks about the yield of Waist ten-year at 1%, or below!), but I'm wary of accurate forecasts.
- Peripheral yields on the rise; the Spanish 7-year bond has already dangerously approached the XNUMX% threshold (the one, to be clear, that led Portugal and Ireland on the path of no return).
- In Italy pressure on the BTP and, above all, on the most illiquid part of the Italian debt: BTP inflation linked and CCT.
- Corporate Titles (corporate) with medium-high credit rating (Investment grade) in modest expansion (increasing yields), underperformance likely of stocks linked to the economic cycle.
- Low credit rating corporate securities (High yield), penalized as a higher risk activity.
- Corporate shares belonging to the financial sector heavily penalised: both investment grade is High yield, among the latter in particular subordinated bank bonds whose fate, in the event of Greece's exit, could be unclear.
- Declining European stock markets: the banking sector is particularly penalized, underperformance also of cyclical sectors given the probable consequences at the level of the economic cycle; In decline, but to a lesser extent, the defensive sectors.
- Overseas equity markets: probable drop linked to fears of protracted economic recession and flight from risky assets.
- Currencies: appreciation against the euro, especially the dollar and the yen.
- Commodity market hit by global recession fears.
As mentioned some of these trends are already underway and the worsening and persistence of these processes will be largely linked to reaction of the political Authorities.
In case the ECB and other Central Banks were poorly involved, there is a risk that the situations outlined above will die down and as a result it may take longer to reverse, German bond rates may remain very low for a long time (as in Japan) and risky assets will continue to come under pressure .
In the desirable case of a decisive intervention by the ECB, the trends could also suddenly reverse due to the "covering" of operators who have "risk-free" portfolios: everyone would run to sell Waist and there would be a rally of peripheral bonds (Italy and Spain in the lead). The same would also occur for the High yield, corporate securities investment grade and senior financial bonds.
I have my doubts about subordinated bank bonds (T1 above all), as they could be assimilated to equities to facilitate bank recapitalizations that are still necessary. If they will also accompany the intervention of the Central Bank interventions in favor of economic growth, the effect will also be extended to all activities benefiting from economic development, such as cyclical and industrial stocks.
That said it's hard to get it right trends, but even more difficult is being able to get it right timing, i.e. buy or sell managing to hit exactly i turning points.
The investment portfolio should be designed slowly and built with patience, being aware of the risks that you are going to bear and of the existence of high volatility, which characterizes most of the financial activities in this period.
To all traderoni (those who enter and leave financial activities quickly) my esteem and my personal "good luck", in this period you can make fortunes but also good disasters.
