Some fund houses believe Greece outcome containable

Added 30th June 2015

Greece's possible default and exit from the Eurozone will not undermine Europe's economic recovery, some fund houses say.

Some fund houses believe Greece outcome containable

The Eurozone is less vulnerable and better equipped to deal with political and economic uncertainty in a member state than in previous periods, according to M&G Investments' view.

“The potential for contagion into other countries seems less likely today than in previous years, given the strengthening economic outlook for much of the Eurozone and supportive measures taken by the European Central Bank,” the firm said.

Even if contagion does become a serious risk, the ECB has shown its willingness to employ quantitative easing. This could prove beneficial for other European assets, M&G said.

Rory Bateman, head of UK and European equities at Schroders, echoed similar views.

“The consequences of a Greek default and the imposition of capital controls will have a dramatic effect on Greece but a limited economic bearing on the wider Eurozone,” said Bateman.

"Financial market volatility might convince the US Federal Reserve to keep interest rates on hold at its September meeting"

Volatility in markets is likely to continue for an extended period until the consequences of a potential Greek exit from the euro are fully understood, he said.

However he also said there is reasonable downside protection given the QE programme. Moreover, European equity market valuations look supportive.

“While expectations of a recovery in Europe have been factored into equity valuations to some extent, the potential for margin expansion across many European corporates remains,” Bateman added.

Much less violent

JP Morgan Asset Management said the Greece impact is expected to be “much less violent” than in 2011 and 2012.

“Europe is more able to take the fallout from Greek turbulence, with stronger economies, healthier banking sectors, smaller fiscal deficits and greatly reduced linkages to Greece itself.”

Politics was going to cause volatility in European assets this year anyway,  said the fund house. 

“The big picture remains one of economic recovery and aggressive policy action that should support corporate earnings. Both the equity and debt of quality European companies should perform well in this environment and reward investors who stay invested. If risk assets do decline significantly over coming days, we would tend to regard that as a buying opportunity,” JP Morgan concluded.

Not everyone agrees

Global markets will still be roiled if Greece leaves the euro, according Eric Chaney, head of the research and investment strategy team at AXA Investment Managers.

He has a different view. A referendum scheduled for Sunday, July 5 asks the people to decide whether to accept or reject the terms of Greece's creditors.

If the vote clearly rejects the terms, the likely outcome is an exit from the euro.

In that case, "financial markets would most likely react negatively, with the euro down another 5% to 10%, as well as equity markets. Peripheral spreads are unlikely to widen dramatically beyond what is mentioned above, given the threat of ECB’s interventions.

"Financial market volatility might convince the US Federal Reserve to keep interest rates on hold at its September meeting."

In the worst case, Greece could leave the European Union, possibly resulting in social unrest and political instability in Southeastern Europe, the firm said. 

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