23 October 2015

Insulating your portfolio from Eurozone Greek-tagion

As Greece and the Eurozone are locked in uneasy interdependence, how can traders insulate themselves against further contagion?


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​​​Image Source: iStock

The background

Against expectations, Greece has failed to pay back the money it borrowed from the International Monetary Fund and refuses to bend to IMF, European Central Bank and Eurozone partner pressure on how and when it will do this. 

 
Greece’s anti-austerity politics have prompted concerns that it could be a catalyst for other ‘peripheral’ Eurozone economies such as Spain, Portugal and Ireland, to try to renegotiate their respective loan terms.
 
A fear that anti-austerity politics will sweep through these peripheral economies and test the commitment of ‘core’ economies such as Germany and France to the Eurozone project. Talk of Grexits and Brexits compound a sense of Eurozone fragility and weigh on capital and currency markets.

 

Which assets have been most affected?

  • Exposed government bond yields are on the up: Greek government bonds have soared, while Goldman Sachs estimated that Italian and Spanish bonds against Germany could widen by up to 350 basis points.
  • Oil has fallen as a result of demand concerns.
  • The euro has weekend.
  • Equities around the globe have suffered as confidence has been eroded.
  • Currency safe havens, the USD and The Swiss franc have attracted flows from the Eurozone.
  • Gold, a traditional ‘safe haven’ asset in turbulent times, has risen.
The move in financial markets is understandable and a natural reaction, but investors should remember that the world is a different place from the last time that Greece threatened to exit the euro.

 

Four reasons why the situation is different from 2010-2012:

  1. Banks and countries have reduced direct exposure to Greece, although this now sits largely with central banks.
  2. European banks are more financially stable.
  3. The peripheral countries have stabilized their finances.
  4. The ECB appears determined to use all instruments available within its mandate to maintain the Eurozone.

How can investors protect themselves from contagion?

Volatility protection has understandably proved popular in this environment and is now looking expensive. Aside from volatility protection and reducing direct exposure to Greece and the Eurozone, there is very little investors can do to protect against Eurozone contagion, the mere threat of which is affecting every asset class. 

 

Where do opportunities lie?

The sell-off in the equity markets may present a heightened opportunity, particularly in Eurozone stocks. Providing the end result is not a break-up of the union, once the fuss dies down equities are expected to rally again, given the favourable conditions provided by loose monetary policy.

 
Both Gold and US sovereign bonds are often seen as safe-haven assets at times of global market turmoil, though traders may consider these in the context of their own risk appetite, investment strategy and according to prevailing market prices.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.