Europe has moved on
Markets have reacted predictably to this fiasco. Greek shares have swooned, peripheral European bond yields have risen and safe haven assets, such as German bunds, performed well. Perhaps this is exactly as the Greek game theorists had planned; and that a continuation of these movements would blackmail her creditors into bailing her out on favourable terms again.
But the rest of Europe appears to have moved on. Too often the Greek Peter has cried wolf. Since this crisis first reared its head in 2010-11, the ECB and the EU have developed a formidable armoury of defences to allow them to protect the euro and its member nations, if they have the desire to do so. And of course, the ECB is now engaged in a programme of quantitative easing of €60bn per month, including the ability to purchase government bonds, if needed.
It looks like Europe is calling Greece’s bluff; there is no desire to support them further other than on the terms they had on the table last Friday. If this is the case, then Tsipras, Varoufakis and their friends were mistaken. They thought they had a bad hand, and even so played it badly. In fact they had no hand at all.
In the face of these uncertainties, earlier in June, Canaccord Genuity Wealth Management reduced our clients’ equity exposure, and particularly their European equity exposure, leaving the proceeds in cash.
There are many other headwinds for risky assets to face at the moment: the 21% plunge in bubble-territory Chinese equities over the last two weeks; the impending rise, likely in September, in US interest rates; full valuations in both equity and fixed income assets; and a gloomy geopolitical environment.
But neither should we forget the tailwinds that support a more positive longer-term picture: steady, if not spectacular growth in the US, the UK and even in China; ultra-low interest rates across the world; QE in Europe and Japan; very strong global demographics (albeit less so in Europe, Japan and China); strong corporate balance sheets; growing dividends; and mergers and acquisitions activity picking up.
In this environment, all else equal, we will be looking to add to riskier assets such as equities in the face of any significant fall in share markets over the coming, volatile summer months.
