Opinion: ‘Spectacular rallies’ await investors who buy Greece now
Published: June 30, two thousand fifteen Four:16 p.m. ET
The country’s stocks, and even some in broader Europe, stand to build up after the crisis completes
MichaelBrush
After months of complacency, a little fear has crept back into the markets. Fear is good because one of the best ways to make money is to buy fear, says Lawrence McDonald, head of U.S. macro strategy at Societe Generale.
A good way to buy fear is to go long on Greek stocks via the exchange traded fund Global X FTSE Greece twenty ETF GREK, -0.49% “Over the next week, there is a good chance we may see spectacular rallies, because this is by no means over,” says McDonald.
McDonald sees Greek shares as more of a trading chance but, ultimately, he thinks Greece will stay in the eurozone, which suggests the Global X FTSE Greece twenty ETF might be good for the long haul, too. “We’re optimistic that a resolution will be reached,” he says.
Even if we get a Grexit, several positives in that screenplay will help Greek companies in the long run. (More on that below.)
If Greek stocks seem too risky, here is a safer way to go: Interchange U.S. stocks for the cheaper shares of European companies getting hit by Europe’s latest Hellenic headache. European economies have been improving, maintains James Paulsen, chief strategist at Wells Capital Management. And Europe is still in a phase of monetary easing compared to the U.S., which is headed into a tightening phase, he says.
An ETF to consider for the job here is Vanguard FTSE Europe ETF VGK, +0.19% down 7% from May peaks. It now offers a Three.3% yield. If you choose individual stocks, consider quality banks and insurers getting hurt like ING Groep ING, +0.34% Credit Agricole CRARY, +0.23% Societe Generale SCGLY, -0.09% and Intesa Sanpaolo ISNPY, -0.34% say analysts at Credit Suisse, which has an “outperform” rating on all of those companies.
Of course, to buy fear, you have to have some rationale for thinking the fear is overdone. Here are my five reasons why the current fears about Greece are exaggerated.
1. Greece will not be another “Lehman.”
One of the reasons for the Greece-related selling on June twenty nine was that Fresh York Federal Reserve Bank President William Dudley mentioned the dreaded “L” word while cautioning investors about a potential Grexit contagion, says Ed Yardeni of Yardeni Research. Said Dudley in a media report: “People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did.”
Ouch. No one wants to hear Lehman brought up at a time like this.
And they shouldn’t have to, since most of Greece’s debt has been moved out of private palms and on to the books of European governments. European bank exposure is minimal, says Credit Suisse analyst Carla Antunes-Silva. Yardeni says: “I earnestly doubt that the contagion potential of a Grexit is comparable to the financial meltdown triggered by the Lehman debacle.”
Two. Greece’s missed 1.Five billion euro payment to the International Monetary Fund this week most likely won’t lead to a default disaster.
“The IMF won’t do it,” maintains McDonald. “They will give Greece three or four weeks. We’ve had meetings with a lot of IMF officials, and if there is a chance of a deal, they are not going to put Greece into default.”
He thinks European creditors were ready to sweeten their suggest to Greece, but that got cut brief when Greek government officials walked out of negotiations last weekend. He still thinks Europe could sweeten the deal this week. “That may not work, but in the brief term it could create a pop in Greek stocks.”
Three. The European Central Bank is maintaining so-called emergency liquidity assistance for Greek banks.
Albeit the ECB stopped brief of enhancing support, news that it isn’t walking away tells us “the ECB hasn’t turned their backs on Greece,” says McDonald. Greek banks may need more support soon because of the run on deposits. And the ECB has left the door open for this.
In a press release, the ECB said it “stands ready to reconsider its decision” to cap assistance, and that “it will work closely with the Bank of Greece to maintain financial stability.” The implication is that the ECB will suggest more support to Greek banks if Greece accepts European austerity requests and stays in the eurozone, says McDonald.
This kind of ECB pressure tactic helped woo Cyprus to accept European reform requests, points out Credit Suisse analyst Andrew Garthwaite. Meantime, to shore up its banks in the brief term, Greece has closed all banks until July five and limited ATM withdrawals to sixty euros per day.
Four. Greeks want to be in Europe.
Greece walked out of negotiations with Europe last weekend and opted to put the euro issue to a referendum vote on July five because government leaders were having trouble selling creditors’ reforms to political allies at home.
But polls showcase Greeks want to be in Europe. This is one of the key reasons why Garthwaite, at Credit Suisse, puts the odds of a Grexit at just one in three. Opinion surveys demonstrate that 70% of the electorate want to stay in the eurozone, and 57% want this even at the expense of austerity, says Garthwaite.
One key to how the referendum vote will turn out is the week-long bank shutdown and thresholds on withdrawals, and whether anger among voters about this gets directed at Europe or the Greek government for walking out of talks. “It may be necessary to inject such difficult and irregular territory in order to break the political impasse and budge forward,” says Goldman Sachs analyst Huw Pill. In brief, the anguish may persuade Greeks to go with Europe, but Pill cautions the referendum outcome is far from clear.
“My hunch is that the Greeks will vote to stay in the eurozone, providing the government the political cover necessary to budge forward with the deal suggested by its creditors,” says Yardeni.
Five. Greece and Europe aren’t that far apart on a deal.
There was just a puny gap inbetween creditors and Greece prior to the breakdown in talks — on issues like how much to cut pensions and raise business taxes. Europe wants Greece to cut pensions more than Greece wants. Greece wants to cut them less and make up the rest with higher business taxes. The petite gap, however, suggests the two sides could fairly lightly patch things up.
But what if Greece does exit the euro and you are stuck holding the Global X FTSE Greece twenty ETF? That might not be so bad — in the long term.
“You have to assume that a substantial amount of the correction is priced in,” says McDonald. He estimates a Grexit would trim another 10% to 15% off Greek stocks. But he points out there would be advantages for Greek companies, and the market would begin pricing those in, too, at some point.
For example, Greek exports would be much more attractive because of the currency devaluation that would go after a Grexit. And foreign investment would flow in once there’s some clarity on where Greece stands.
More likely, tho’, Greece will stay in Europe, and proceed to have the kind of trouble that periphery countries have dealing with European Union targets on government debt and inflation. “We’ve had two bailouts and here we are in the midst of it again,” says Yardeni. “Greece will proceed to be a ache in the periphery.”
At the time of publication, Michael Brush held GREK, VGK and ISNPY, and he has suggested GREK, VGK and ISNPY in his stock newsletter “Brush Up on Stocks.” Brush is a Manhattan-based financial writer who has covered business for the Fresh York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.
Spectacular rallies’ await investors who buy Greece now
Opinion: ‘Spectacular rallies’ await investors who buy Greece now
Published: June 30, two thousand fifteen Four:16 p.m. ET
The country’s stocks, and even some in broader Europe, stand to build up after the crisis completes
MichaelBrush
After months of complacency, a little fear has crept back into the markets. Fear is good because one of the best ways to make money is to buy fear, says Lawrence McDonald, head of U.S. macro strategy at Societe Generale.
A good way to buy fear is to go long on Greek stocks via the exchange traded fund Global X FTSE Greece twenty ETF GREK, -0.49% “Over the next week, there is a good chance we may see spectacular rallies, because this is by no means over,” says McDonald.
McDonald sees Greek shares as more of a trading chance but, ultimately, he thinks Greece will stay in the eurozone, which suggests the Global X FTSE Greece twenty ETF might be good for the long haul, too. “We’re optimistic that a resolution will be reached,” he says.
Even if we get a Grexit, several positives in that script will help Greek companies in the long run. (More on that below.)
If Greek stocks seem too risky, here is a safer way to go: Interchange U.S. stocks for the cheaper shares of European companies getting hit by Europe’s latest Hellenic headache. European economies have been improving, maintains James Paulsen, chief strategist at Wells Capital Management. And Europe is still in a phase of monetary easing compared to the U.S., which is headed into a tightening phase, he says.
An ETF to consider for the job here is Vanguard FTSE Europe ETF VGK, +0.19% down 7% from May peaks. It now offers a Three.3% yield. If you choose individual stocks, consider quality banks and insurers getting hurt like ING Groep ING, +0.34% Credit Agricole CRARY, +0.23% Societe Generale SCGLY, -0.09% and Intesa Sanpaolo ISNPY, -0.34% say analysts at Credit Suisse, which has an “outperform” rating on all of those companies.
Of course, to buy fear, you have to have some rationale for thinking the fear is overdone. Here are my five reasons why the current fears about Greece are exaggerated.
1. Greece will not be another “Lehman.”
One of the reasons for the Greece-related selling on June twenty nine was that Fresh York Federal Reserve Bank President William Dudley mentioned the dreaded “L” word while cautioning investors about a potential Grexit contagion, says Ed Yardeni of Yardeni Research. Said Dudley in a media report: “People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did.”
Ouch. No one wants to hear Lehman brought up at a time like this.
And they shouldn’t have to, since most of Greece’s debt has been moved out of private palms and on to the books of European governments. European bank exposure is minimal, says Credit Suisse analyst Carla Antunes-Silva. Yardeni says: “I earnestly doubt that the contagion potential of a Grexit is comparable to the financial meltdown triggered by the Lehman debacle.”
Two. Greece’s missed 1.Five billion euro payment to the International Monetary Fund this week most likely won’t lead to a default disaster.
“The IMF won’t do it,” maintains McDonald. “They will give Greece three or four weeks. We’ve had meetings with a lot of IMF officials, and if there is a chance of a deal, they are not going to put Greece into default.”
He thinks European creditors were ready to sweeten their suggest to Greece, but that got cut brief when Greek government officials walked out of negotiations last weekend. He still thinks Europe could sweeten the deal this week. “That may not work, but in the brief term it could create a pop in Greek stocks.”
Trio. The European Central Bank is maintaining so-called emergency liquidity assistance for Greek banks.
Albeit the ECB stopped brief of enlargening support, news that it isn’t walking away tells us “the ECB hasn’t turned their backs on Greece,” says McDonald. Greek banks may need more support soon because of the run on deposits. And the ECB has left the door open for this.
In a press release, the ECB said it “stands ready to reconsider its decision” to cap assistance, and that “it will work closely with the Bank of Greece to maintain financial stability.” The implication is that the ECB will suggest more support to Greek banks if Greece accepts European austerity requests and stays in the eurozone, says McDonald.
This kind of ECB pressure tactic helped woo Cyprus to accept European reform requests, points out Credit Suisse analyst Andrew Garthwaite. Meantime, to shore up its banks in the brief term, Greece has closed all banks until July five and limited ATM withdrawals to sixty euros per day.
Four. Greeks want to be in Europe.
Greece walked out of negotiations with Europe last weekend and opted to put the euro issue to a referendum vote on July five because government leaders were having trouble selling creditors’ reforms to political allies at home.
But polls showcase Greeks want to be in Europe. This is one of the key reasons why Garthwaite, at Credit Suisse, puts the odds of a Grexit at just one in three. Opinion surveys demonstrate that 70% of the electorate want to stay in the eurozone, and 57% want this even at the expense of austerity, says Garthwaite.
One key to how the referendum vote will turn out is the week-long bank shutdown and boundaries on withdrawals, and whether anger among voters about this gets directed at Europe or the Greek government for walking out of talks. “It may be necessary to come in such difficult and irregular territory in order to break the political impasse and stir forward,” says Goldman Sachs analyst Huw Pill. In brief, the ache may coax Greeks to go with Europe, but Pill cautions the referendum outcome is far from clear.
“My hunch is that the Greeks will vote to stay in the eurozone, providing the government the political cover necessary to stir forward with the deal suggested by its creditors,” says Yardeni.
Five. Greece and Europe aren’t that far apart on a deal.
There was just a petite gap inbetween creditors and Greece prior to the breakdown in talks — on issues like how much to cut pensions and raise business taxes. Europe wants Greece to cut pensions more than Greece wants. Greece wants to cut them less and make up the rest with higher business taxes. The puny gap, however, suggests the two sides could fairly lightly patch things up.
But what if Greece does exit the euro and you are stuck holding the Global X FTSE Greece twenty ETF? That might not be so bad — in the long term.
“You have to assume that a substantial amount of the correction is priced in,” says McDonald. He estimates a Grexit would trim another 10% to 15% off Greek stocks. But he points out there would be advantages for Greek companies, and the market would commence pricing those in, too, at some point.
For example, Greek exports would be much more attractive because of the currency devaluation that would go after a Grexit. And foreign investment would flow in once there’s some clarity on where Greece stands.
More likely, tho’, Greece will stay in Europe, and proceed to have the kind of trouble that periphery countries have dealing with European Union targets on government debt and inflation. “We’ve had two bailouts and here we are in the midst of it again,” says Yardeni. “Greece will proceed to be a agony in the periphery.”
At the time of publication, Michael Brush held GREK, VGK and ISNPY, and he has suggested GREK, VGK and ISNPY in his stock newsletter “Brush Up on Stocks.” Brush is a Manhattan-based financial writer who has covered business for the Fresh York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.