Notable bulls on Greek equities and bonds have slashed holdings to almost nil of late, according to research by FE Trustnet, as a bailout deal with the country’s creditors looks brittle and the prospect of a ‘Grexit’ looms.
Greek stocks took a strong hit during the financial crisis and the MSCI Greece is currently down 91.2 per cent since June 2008 due to a disastrous period during the 2011 European sovereign debt crisis, which has persisted while the rest of Europe has rebounded.
Performance of index over 7yrs
Source: FE Analytics
The real damage was done between October 2009 and June 2012 when the Greek economy and political system went into meltdown over its sovereign debt levels and near broken banking system, which later prompted a bailout by the European Union, European Central Bank and International Monetary Fund – known as the Troika.
However, Argonaut Capital’s Barry Norris (pictured), manager of the Argonaut European Alpha and Argonaut Absolute Return funds, was expecting strong returns from Greek holdings last year, particularly in the banking sector, as improving balance sheets would drive up share prices.
The FE Alpha Manager said in February 2014 that he had started buying Greek banks, leading to an 8.7 per cent overweight in Greece in his £341m Argonaut European Alpha fund.
However, the fund now has nothing in Greece and other Argonaut funds such as Argonaut European Enhanced Income and Argonaut European Income have also nothing, having reduced their positions in October 2014.
Norris says that he now is expecting Greece to default on the next tranche of its repayment obligations, increasing the risk of Greece leaving the European Union substantially.
“Whilst we know that the Greek government is running out of cash, in the absence of an end to Greek brinksmanship, it seems likely that the final roll of the dice will be a sovereign default,” he said.
“We do not yet know which bond they will default on or the exact consequences of default. It is worth pointing out that a Greek default won’t necessarily lead to a Grexit, as this would likely only happen if and when the ECB withdrew Emergency Liquidity Assistance [ELA] to the Greek banking sector.”
“The rules of providing ELA would seem to suggest that it can only be provided to ‘solvent’ institutions. Therefore if the sovereign had defaulted, could its commercial banks still be regarded as ‘solvent’? Possibly, but this could be nothing other than a stop-gap solution, given likely accelerated capital flight and loss of credibility,” he added.
“If and when the ECB withdraw access to the ELA, Greece would be forced to introduce a parallel currency and institute controls to prevent accelerated capital flight. This would likely be a tragedy for Greece but not for the rest of Europe. Greece: goodbye and, sadly, good riddance.”
Norris adds that it should not knock the fortunes of the wider European recovery and equity market performance off track.
“Without economic reform, the Greek economy has little chance of regaining the necessary competitiveness within the eurozone. As such, continuing to provide financial liquidity to an economy that could never realistically wean itself off financial aid would just be throwing good money after bad.”
“Of course, there will be concerns over ‘contagion’ effects of the Greek default, particularly given that previously euro membership was considered inviolable. However, the longer term risks of political contagion need to be weighed against short-term financial contagion.”
David Madden, market analyst at IG, says “traders can’t get out of the [Greek] market fast enough”, prompting fresh fears that worry may spread to the rest of Europe.
“We are back to the bad old days of the eurozone debt crisis, when equity markets around Europe are selling off hard and fast. Only the brave stay long in the stock markets and it is difficult to keep your nerve when you are facing a sea of red trading screens,” he said.
Athens is doing its best to grind down its creditors and unlock the next round of the bailout without giving too much away in concessions. A deal over Greece’s finances isn’t in sight yet, and even though the ECB has a track record of brokering an agreement at the last minute it is confident enough to buy into the market now.”
Significant chunks of exposure do persist in some funds, although without exception these are specifically are focused on ‘new’ or ‘emerging’ European regions in their mandates.
For example the €1bn BlackRock Emerging Europe fund managed by Sam Vecht has 5.71 per cent in Greece. Colin Croft’s Jupiter New Europe and Jupiter Emerging European Opportunities have 3.91 per cent and 4.14 per cent respectively. JPM New Europe has 2.9 per cent.
Azad Zangana, Schroders’ senior European economist, says even if a solution for Greece is agreed it will take some time before corporates and investors return to the country, suggesting “growth will remain sluggish for some time”.
“Overall, the eurozone economy remains fragile, but it has enjoyed a good start to 2015. Low inflation is helping to boost the purchasing power of households, while easier lending conditions are helping to support corporates that are seeking to invest,” he added.
