During eleven of Expert Investor Europe’s investment fora across Europe held this spring, we asked delegates about their attitude towards the Greek drama. While the share of delegates believing Greece will exit the eurozone varies wildly, from just 23% in the Netherlands to 53% in Denmark, it has remained quite constant between March and early June. On average, one in three European fund buyers believe Greece will exit the eurozone and return to the drachme.
A the same time, more than four in 10 fund selectors think financial markets underestimate the seriousness of the Greek crisis, a percentage which is quite constant across Europe. Until very recently, bond and equity markets had been shrugging off the recurring breakdowns of talks between Greece and its creditors.
We also asked fund selectors how they would adjust their portfolios if they deemed a Grexit likely. Belying the market complacency of the past few months, four in 10 fund selectors answered they would reduce both their equity and bond holdings. Most of the rest said they would reduce either peripheral bonds or all government bonds.
Hedge or sell
Though, admittedly, we can’t say whether the share of Grexit-believers had increased dramatically during the past two weeks, it has probably not decreased. And all the fund selectors your reporter spoke to this week have adjusted their allocation following the increase of Grexit-rumours. Most have reduced their exposure to (European) equities or have started to hedge it.
“Concerns about Grexit contributed to our recent decision to reduce our equity exposure to a neutral level,” says José Luis Borges, head of institutional portfolios at BPI Gestao de Activos in Portugal.
Borges’ concerns are shared by Tristan Delaunay, CEO of Athymis Gestion, a Paris-based multi-manager boutique. But he has taken a slightly different approach. “Just half a month ago we got the conviction that Greece is going to default and is not going to stay in the eurozone,” he says. Delaunay, however, chose not to decrease his exposure to European equities, which stands at typically between 10% and 20% (depending on the portfolio), in response.
“Instead we have hedged all our exposure by selling futures on the Eurostoxx 50. We also have quite some exposure to US dollar (equities), the Norwegian krone, through high yield bonds, and sterling, as we expect the euro to tumble because of what’s happening in Greece.”
European government bonds, especially the peripheral ones, will also be affected negatively by a Grexit, Delaunay believes. “But we don’t have any exposure to this asset class. We only own corporate bonds, mainly high yield,” he says.
However, not everyone has been decreasing his exposure to European equity exposure, though Jaap Bouma (pictured right), a senior portfolio manager for the Dutch wealth manager Optimix, admits that he regrets not having done so. “Our decision not to sell is hurting us now, as European equities comprise almost 20% of our total portfolio, but we are not reversing our call to stay put. Markets could go down 5% more, but it’s extremely difficult to time when to step back in again. I wonder how all these people who reduced their exposure to European equities are going to do that,” he says.
Bouma believed the area which would be affected most by an increase of Grexit rumours would not be European equities, but peripheral government bonds. “So we sold our long exposure to Italian and Spanish government bonds, though we still have short-duration Spanish bonds, and have reduced the duration of our bond portfolio from 5.2 to 3,” he says. “We now have a core of safe short-duration government bonds complemented with emerging market debt and US high yield. I believe that makes a lot of sense in this environment, as the upside on long-duration government bonds is limited anyway.”
Uncertainty: the only certainty
Delaunay opted for hedging his European equity exposure instead of selling it off, because he believes Greece will only be a short-term issue for the markets, even if a Grexit actually materialises.
“We have been talking about this for four years now, so people have had time to prepare. Therefore a Grexit will not trigger a major crisis, but probably only something like a correction,” he says.
Not everybody thinks as lightly about the consequences of a Grexit though. “If Greece goes bust, so what?” says Jacques Bossuyt, a fund selector at Novacap Asset Management in Luxembourg. “The danger is, however, that the markets will take Greece’s bankruptcy as an excuse to trigger a crisis.”
In the end, adding the unpredictable game theorist annex Greek finance minister Yanis Varoufakis to the equation, there is probably only one thing we can conclude, and that is that there is a whole lot of uncertainty, which is not going to fade for some time to come. “Now I’m actually not so sure about a Grexit anymore. My opinion is changing from one day to the other,” Delaunay says tellingly.
And for most investors, uncertainty is a strong incentive to sell, maybe even more so than if a Grexit would be a given. So your reporter’s bet is that markets will continue their downward path for some time to come.