Grexit – a long par 5 with loads of bunkers 27 May, 2012.
Greece exit, “Grexit”, is now the hottest topic
in town, from being the unthinkable to almost inevitable. For individual investors, to put it mildly,
it is going to be a long par 5 with loads of bunkers and water hazards. The good news is that all the scenarios are
being covered and discussed in details by media, politicians and
economists. You can read them like a
map. The bad news is that most people
will drop a few shots in this hole. The
winner is the one who could avoid the bunkers and the water hazard, take
advantage of the contour and wind.
Bunker #1:
Greece default
The political situation in Greece is
pointing towards a hang parliament. The
voters want to stay in EU but do not want austerity. I can sympathize that but unfortunately, this
could mean EU turns off the tap and Greece will default on its debt. There will be no money to pay public servants
and Greece will need to bring the Drachma back.
The question is that who want to be paid in Drachma? There is investment bank research saying the
Drachma would be significant weaker than Euro.
Bunker #2:
Portugal, Spain and Italy
EU needs to put a solid firewall to stop
the panic spread into other members. One
powerful tool is to say, “Your debt is my debt”! In return, Portugal, Spain and Italy will
need to commit to austerity. So far, the
EU or European Central Bank does not give us the impression that they are willing
to make such bold statement. We are
likely to have a softer version of bailout and austerity commitment
arrangement. This will keep this
Eurozone thriller going for a few more series.
Bunker #2:
Banks
It maybe easier to deal with the bankers
than politicians. In the case of a
Grexit, we should prepare to see more banks getting nationalized and state-aid. Regulators and banks have been looking at the
Grexit scenario and there is no happy ending.
To protect the public, there are protection scheme for bank
deposits. I think investors should ask
their banks to double check the protection amount and conditions. Read the small print and make no assumption. What will happen to the banks in Greece? If Greece brings back Drachma, they may
impose restriction on currency convertibility and movement. Best to stay well away from this deep bunker.
Water hazard: Euro
What will happen to Euro? Can we live without it? Most European companies are used to dealing
with Euro. Imagine those mighty German
car makers. They manufacture cars in
Germany and sell them all over Europe.
If the Euro breaks up, these car makers will have cost in Deutsche Mark
and revenue in Lira, Peseta, Escudo.
Moving back to different European currencies will likely sink many
companies and lead to even more pressure on banks who lent to corporates.
How to stay on the fairway?
Investors could consider asking their
advisors about funds on British government Gilt, Swiss Franc denominated bond,
Swedish Krona based products. The common
theme is to reduce Euro exposure and be very cautious about investing into
companies whether through buying their shares or their bond. The strategy is to stay in play and get on
the green without dropping shots in bunkers and water hazard.
Once the Grexit happens, there should be a
shock to the whole financial market and they maybe bargain hunting
opportunities. Look at 2009 or even the
4th quarter in 2011, there were handsome return when the markets
rebounded from fear to mildly optimistic.
I would think this time round the bargain could be in fixed income
products or bonds as desperate sellers push prices to distressed level. Bargain hunting opportunity could appear in
utilities stocks. People will need
water, electricity and trains. The
operators may suffer in the short term as income decreases while long term
capacity investment has already been committed.
This could send share prices down or even cripple some companies with
weak cashflow and highly leveraged balance sheet. The survivors could enjoy less competition in
the future and share price may recover.
This par 5 could be a chance for you to get ahead of your peers as they
drop shots in bunkers.
