Life beyond Greece
Posted on February 20 2012
“Action may not always bring happiness, but there is no happiness without action” Benjamin Disraeli
In a relatively quiet week for economic and corporate news flow, it’s been the (still) unfolding ‘Greek tragedy’ that has commanded the bulk of the market’s attention. Another deadline has been set for Monday, though whether this is any more credible than the last several is hard to say.
This week has seen Greece’s stakeholders attempt to sound more relaxed about the potential ramifications of a messy default. This studied insouciance has been accompanied by EU negotiators taking a harder line with Athens regarding the implementation of a further austerity programme. The fact is, no one knows for sure the broader implications of Greece defaulting on its debts. The increased confidence shown by some in the midst of current negotiations is no doubt helped by the ECB’s recent activities, as well as the bail out funds still sitting on the sidelines, but the reality is still untested.
This is, of course, is not the only uncertainty on the horizon. Rising oil prices this week testified to more aggressive rhetoric out of Tehran. However, in the context of a signalled move back to the negotiating table, Tehran’s threats could be seen as an attempt to strengthen their hand.
Upcoming French elections similarly have the potential to hurt investors, particularly if the French electorate vote the way they have recently polled.
All this, alongside the fact that equity markets are now almost back up to levels from which they fell so dramatically half way through last year, and you can understand why some in the market are starting to wonder whether the rally in risk assets is about to end. Near term, we believe there is potential for a pull-back given the size of the rally so far and some of the near-term uncertainties out there. However, there are still several reasons why we believe investors will benefit from having a slightly greater than usual allocation to risk assets within a balanced portfolio.
The US recovery now looks to be on much more stable footing; the jobs market is gaining momentum; manufacturing and non-manufacturing order books look healthy; and there might even be tentative signs of life in the long-dead housing market.
In Europe, data currently points to economies stabilising rather than lurching lower. We have credible new governments in place in several of the most troubled countries: Spain and Italy are two important examples.
Central banks around the world continue to do their bit to maintain financial stability. Real interest rates in the developed world remain at record lows, while emerging market central banks have been starting to unwind policy. The ECB has been particularly helpful with its lending operations, which we will see more of at the end of this month, while US monetary authorities have been similarly active for some time now.
With asset class valuations still focused on a markedly gloomier outcome than we think is likely, some exposure to risk should be rewarded, though a degree of sangfroid may be required.
Will Hobbs, Equity Strategy and Fadi Zaher, Fixed Income Strategy.