What to Do About Greece

5/25/2012

Andreas Utermann, global CIO of Allianz Global Investors, discusses the latest developments in the euro-zone debt crisis, what it means for the markets and steps investors can take to cope with uncertainty and volatility.

Untitled Document

Recent Developments

Growth financed by fiscal spending seems to have been the mantra of many European heads of state and government at this week’s unofficial European Union (EU) summit in Brussels. Germany disagreed, preferring structural reforms to fiscal spending to get growth going.
Since the participants did not agree on the key issues, there were no major results, but they intend to draft plans for closer fiscal cooperation—and perhaps joint deposit insurance—ahead of their June summit.
We continue to see tremendous market uncertainty about Greece, which explains the current “risk-off” environment.
The risk of a disorderly exit of Greece from the euro currency union—and, consequently, from the EU—continues to grow since Greece’s May 6 elections.

Our View

We believe this general uncertainty is unlikely to be resolved until at least June 17, when Greece holds its next round of elections.
Our base case remains that Greece should and will remain in the Economic and Monetary Union (EMU). Over 80% of Greek respondents express a wish to stay within the currency union.
If Greece does nevertheless leave the EMU, we believe that would lead to high volatility in the capital markets, at least in the short term. But we also believe Greece’s departure would be unlikely to lead to the collapse of the EMU.
We agree with Germany’s view that continuing to finance growth with new debt will probably lead to an impasse. Instead, growth initiatives should be complemented by structural reforms.
In the short term, we believe market implications are negative for risky assets and the financial sector. In the medium term, a lot depends on EU policy makers as well as on the European Central Bank. If these parties can continue to credibly build a firewall around Greece, then Greece’s effects on the financial markets could be muted.
We take some comfort from the fact that Greece’s default in the spring did not lead to major disruptions in the markets.

Action Steps

Investors who need short-term access to a portion of their portfolios should consider short-duration asset classes, which generally offer higher yields than cash with lower volatility than longer-duration asset classes.
Investors who have a longer-term time horizon should consider dividend-paying stocks, particularly market leaders with strong cash flows, strong dividend growth rates and international business models.

Past performance is no guarantee of future results. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

A Word About Risk: Equities have tended to be volatile, and, unlike bonds, do not offer a fixed rate of return. Bond prices will normally decline as interest rates rise; the impact may be greater with longer-duration bonds. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

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