Grexit – a long par 5 with loads of bunkers 27 May, 2012.

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 4^th 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.