Markets Slide On Greece Frightening

Published in Investing on 24 June 2011

Greece has got bills, they're multiplying, and the market's losing control.

There are times in a crisis when you just want to know the worst. Even bad news is better than the agony of not knowing. If you are suffering from a mystery illness, an accurate diagnosis can be a relief… even if the prognosis isn't good. You know where you stand and can then start dealing with it.

Don't you get that feeling about Greece?

Bad medicine

The EU has squandered billions on quack bailouts and snake-oil aid packages, but all it has done is delay the inevitable. Greece is never going to clear its debts, which total 160% of GDP, while the country remains locked into the eurozone. What Greece needs is a spiky dose of that favourite double action cure-all: default and devaluation.

EU bosses won't allow that, at least, not until they have bought enough time for French and German banks to untangle themselves from this Greek tragedy. Which is bad news for EU taxpayers and investors everywhere.

The drugs don't work

The European sovereign debt crisis has cast a shadow over global stock markets for the past 18 months. Markets have soared on the back of each new bailout package, then crashed back to earth when reality set in. The bailout drugs don't work, yet we still go on pretending.

The soar-slump cycle is getting tighter. On Thursday, we had the panic. On Friday morning, the rebound. Expect more volatility when the Greek parliament votes on the latest austerity plan. If the proposal is rejected, the Greeks don't get the latest slug of the €110b aid package… and run out of money. In mid-July.

So what does this mean for British investors?

The C-word -- contagion

Given the disproportionate size of the UK's financial services industry, we are highly vulnerable to another banking crisis.

True, British banks appear to be in less danger than German and French banks and their subsidiaries, because they have much less exposure to Greek government bonds and business debt.

But markets aren't taking any chances. I thought I was clever buying Barclays (LSE: BARC) when its shares dipped to 290p in January, especially when they quickly zipped up to around 330p. They now stand at 246p.

I nearly broke even on Lloyds Banking (LSE: LLOY) when its shares hit 70p during February… now I'm deeply in the red at 46p.

Last year, Aviva (LSE: AV.) admitted it had £900m exposure to government bonds in the eurozone, of which £150m was Greek debt. Its share price gets bruised every time a Greek rioter throws another stone.

So does my portfolio.

The worm turns

David Cameron may have commendably wriggled out of the Greek bailout package. But any eurozone meltdown would still be disastrous for the UK, because half of our exports go to Europe. Things could turn really nasty if contagion spreads to Portugal, Spain, Italy and Ireland. UK banks have plenty of exposure to Ireland.

This isn't just a European problem. Nobody knows how much exposure American banks and insurers have to Greece, but some have put it at above $100b. No wonder people are talking about Lehman II.

Cash or trash?

The FTSE 100 is a global index, stretching far beyond the eurozone, and its growing exposure to emerging markets may give investors some much-needed protection.

Some sectors will also perform better than others. Neil Woodford at Invesco-Perpetual has been ahead of the game by piling into defensives, notably pharmaceuticals AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK), and cigarette giants British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT).

You may look at other defensive sectors, such as food or drink. Or high yielding, cash-generative stocks such as Vodafone (LSE: VOD), retail powerhouses such as Tesco (LSE: TSCO), bankable Swiss healthcare giants such as Novartis and Roche, utility stocks (anyone for the hugely unloved Drax (LSE: DRX)?), and even luxury brands, much sought after in the wealthy East.

There may also be buying opportunities for the brave, in another dash for trashy banks. Perhaps Prabhat Sakya will finally get his Lloyd's buying opportunity.

Will the pound finally rebound?

If you were hoping the eurozone crisis would bolster sterling, you will have been disappointed so far. The pound has repeatedly failed to rebound against the euro, even though the bond markets appear impressed by George Osborne's attempts to grapple with the deficit. I guess we can blame German manufacturing strength for that.

I've spent too long waiting for the pound to recover to expect anything to happen now. Especially with the Bank of England talking up another bout of quantitative easing. If you disagree, you might want to think about reducing your exposure to the euro.

Beware Greeks demanding gifts

If Greek MPs do agree to another €28bn of spending cuts and further privatisations, we can probably expect another stock market rebound. Another dip will no doubt follow, and in short order, because the Greek prime minister, George Papandreou, has to start his draconian programme on 3 July -- in the teeth of a dreadful recession, mutinous trade unions and furious rioters.

I don't fancy his job.

If MPs don't pass the package, we will just get the dip.

Greece will default -- it is only a matter of time. You know it. Germany knows it. The Greeks know it. Pimco knows it. Stock markets are likely to remain troubled until it happens and the mess is finally cleared up. That could take a while.

Never mind. If we weren't worrying about Greece, we would be paying more attention to the US deficit. Then we might be really panicking.

Disclosure: Harvey owns shares in Aviva, Barclays, GlaxoSmithKline, Lloyds Banking, Tesco and Vodafone. The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline and Tesco.

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diddyda 24 Jun 2011 , 12:41pm

The Greeks will default that is a given. The problem will be where does the rot stop. Ireland, Portugal, Spain, etc.

The Euro is a flawed concept that is doomed to fail, unless god forbid there is complete political union.

For it to continue, Germany will have to continually transfer money to less efficient parts of the zone. Similar to what happens in the UK, where England subsidises the socialist republics of Scotland, Wales and Northern Ireland. This works because we are one country (at least for now).

The pound will continue to weaken, because the bank of England has fallen asleep on the only job it is charged with, controlling inflation. We need to print more money like we need a hole in the head. As a nation we need to spend less and save more. If people cannot afford their mortgage repayments now, what chance do they have when interest rates return to realistic levels.

Darvess 24 Jun 2011 , 1:20pm

The Stock Market is very intelligent and had already priced in the Greek default a long time ago.

Why it rose in the last twelve months was that investors chose to ignore the Greek default thinking it would all be OK and that it would magically go away and continued to pile in their cash ignoring reality (hope over fear).

The smart private investor would be the one who sold their entire stock when the market reached 6000 plus and then re purchased in March this year and sold again when it reached 6000 again.

The high support line for the FTSE 100 is around 6000 for this year so be warned, as the old saying goes " buy on the dips and sell on the highs"

I use trigger alerts based on the movements of the FTSE on volume and MA.

I don't make a lot of money doing this but I don't lose.

FoxAlphaMike 24 Jun 2011 , 1:48pm

Greece is a basket case. What other country can you live in where there are several hundred professions which are listed as 'arduous' so that you can retire at age 50? (included in the list of 'arduous' professions are hairdressers and radio announcers!). Hoefully when Greece defaults it doesn't take Italy, Spain, Portugal etc with her. Fingers crossed.

salmo365 24 Jun 2011 , 2:57pm

if we see a rebound in the next couple of weeks above 6000 I am selling everything but I'm not selling below.

mcturra2000 24 Jun 2011 , 5:59pm

"Neil Woodford at Invesco-Perpetual has been ahead of the game by piling into defensives"

I think that's a somewhat misleading categorisation. He's not "piling" into them "ahead" of the game. Neil has "always" been in defensives, sticking with them through thick and thin.

mcturra2000 24 Jun 2011 , 9:51pm

Why do people say that if Greece fails, the rest will follow? I don't see what's inevitable about it.

Greece seems such a flyspeck of a country, so what's all the fuss about?

Fisher Investments seems convinced that fears over Greek debt exposure are vastly over-rated:

Apologies in advance for my ignorance.

UncleEbenezer 25 Jun 2011 , 6:32am

Where's the difference between bailing out Greece and bailing out individuals within the UK (or any other country) through measures such as paying their mortgage interest?

Aha, yes, here's a difference. At least the taxpayer who contributes to Greece isn't, at the same time, contributing to pricing himself out of a roof over his own head through £21 billion in direct subsidies to landlords underpinning rents.

Greece, unlike Ireland/Portugal/etc, is probably irredeemable and should (be allowed to) default. But it's far from the only one!

Philmoco 25 Jun 2011 , 8:26am

They've been living off the fat and the expectation of it continuing, but won't listen to their government now it's had its arm twisted to come clean!
I believe I might be forgiven for thinking many Unison members are Greek!
Time to sell assets, but they must be aware this can be done only once!
Richard Branson [or some entrepenuerial Turks]would gladly buy a few islands at the right price!

kiffberet 25 Jun 2011 , 8:36am

I like this unsettled Market. It's quite predictable and great for spread betting! I've already made a nice profit on the side and now have buy positions open waiting for a small 7% gain over the next month. Then sell when 'suddenly' the markets realise that Greece is still broke in august...

supasap 27 Jun 2011 , 8:28am

is there anyone who believes that deflation in Europe and then the world is avoidable and if so how come Japan has failed to grow for ages......... economics not called the dull science for nothing...... just need to know when gold will peak myself

LetsGoa 27 Jun 2011 , 11:34am

Greece is not what frighting the markets, Its the USA with the largest debt the world has ever seen.

I find it funny how the financial crisis of 2008 has not been solved, but made worst with Market distorting QE. Why investors are still puttng money in the market NUTZ.

The USA, Japan, UK, Spain & Italy will have to stiff creditor and when they do say bye bye to the bond market and hello to PE ratios in the mid single digits!

Greece like Iceland, Ireland are just a sideshow. keep your powder dry in gold.

supasap 28 Jun 2011 , 8:59am

lets goa, how long has gold got left to rise in your view?

LetsGoa 28 Jun 2011 , 3:27pm

@Supasap As long as The USA has negative real interest rates.

F958B 30 Jun 2011 , 9:53am


" long has gold got left to rise....."

At least another year and at least another +50%.
When DOW:GOLD ratio drops to around 5x (currently 8x) it would be a prudent point to take considerable profits off the table.
DOW:GOLD might go lower, but it becomes an exponentially riskier trade the further the ratio goes below 5.

If you look at a long-term log chart of gold, you will see that the rate of ascent has been remarkably consistent, with no parabolic blowout.
Linear charts are meaningless because a £1 move on a £1 asset is a lot, whereas an identical £1 move on a £1000 asset is negligible but looks as significant unless you use log scaling.

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