Greece takes giant leap toward eurozone exit
Sadiq S. Adatia
Opinions as of July 9, 2015
FLASH MARKET UPDATE
The people of Greece were asked in a referendum Sunday whether the government should accept a bailout proposal from creditors that was put forward in late June. Fully 61% said "no."
To be clear, the result does not equal an exit from the eurozone. Greece's prime minister said in response to the vote that his mandate is still to strike a workable deal with creditors that would see Greece remain part of the currency group. But it indicates that Greeks are willing – if not downright determined – to drag their way out of their economic quagmire on their own terms, either with a common currency or without it.
Events leading up to the referendum unfolded at a furious pace, with Greek banks losing key liquidity lifelines and those same banks restricting cash withdrawals. There were lineups at ATMs throughout the week. The local stock market plunged before it was closed, which remains the status to date. The government missed a payment to the International Monetary Fund and larger, more serious deadlines loom.
Now the finance minister has resigned in a bid to ease tensions at the negotiating table when Greece sits down with lenders to try once more to hammer out a deal.
The referendum result was a surprise to most. Market reaction in the immediate wake of the vote has been muted – so far. The days and weeks ahead are likely to be choppy across all markets as the situation evolves.
We have a strategic view that includes investing in Europe, where we see the potential for healthy returns over the medium and long term despite deep structural challenges – Greece being a case in point. We employ tactical tools that enable us to fine-tune our views based on market conditions. We’ve been defensive on international equity markets for many months precisely because of the uncertainty surrounding a potential "Grexit."
Investors will do well not to get caught up in all the dramatic colour commentary and the dire forecasts. Greece's GDP makes up just one quarter of one percent of the global economy. If it were a province, the economy would slot in somewhere between Alberta's and British Columbia's.
This is not meant to downplay what is certain to be a long, hard road for the people of Greece. The situation is far from resolved.
Though it's not what we feel is even close to a likely scenario, other peripheral eurozone countries that are also highly indebted, for example Italy or Spain, could follow suit. These economies are much bigger and if they were to default the ramifications would be much more severe. (Greece has not yet defaulted, but the possibility is now that much more likely.)
In a word, meetings. Heads of major European countries have already scheduled their post-referendum discussions, with plenty of back-and-forth among eurozone members, the IMF and the ECB likely in the days and weeks ahead.
As of this writing the key date to watch for is July 20, when Greece owes a major payment to the ECB. Leaders will likely scramble to put in place a new bailout agreement so that covenants with the ECB are not breached. Failure to satisfy the ECB's loan conditions could result in a speedy and disorderly exit.
Naturally we remain defensive. Our team will revise our model to account for the greater likelihood of an orderly exit, though with very little likelihood, in our view, of broad market contagion.
Sun Life Global Investments’ retail mutual fund platform has what we would consider to be immaterial exposure to Greece. As of June 30, Sun Life Schroder Emerging Markets Fund had direct exposure of one quarter of one percent. Four of our flagship Sun Life Granite Managed Portfolios invest in that fund, but none has direct exposure of even two one-hundredths of one percent.
We have been positioned for this sort of outcome and have built up some cash to soften any volatility and also to deploy when we see opportunities.
Sun Life Granite Managed Portfolios invest in mutual funds and/or exchange traded funds (ETFs). Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
© Sun Life Global Investments (Canada) Inc., 2015. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.