Euro debt crisis: should investors prepare for a Greek exit?

As the euro crisis sends the stock market tumbling, investment experts remain
surprisingly upbeat about equities.

The chances of Greece exiting the euro intensified last week so much so that
EU leaders were warned to have contingency measures in place.

Such was the demand for safe-haven assets that investors rushed to snap up
German bonds that paid a coupon of 0pc. That’s right, investors piled in to
buy government bonds that will not deliver a return but are deemed among the
eurozone’s safest assets.

Morgan Stanley (EUREX: DWDF.EX – news) , the investment bank, published a note on Friday to warn: “We
think that the ramifications of a Greek exit are more serious than the
market anticipates. While a euro zone break-up is not our base-case
scenario, we raise our subjective probability to 35pc from 25pc, and reduce
the timescale of this move to 12-18 months from five years.

“We believe that the most likely scenario for a divorce is a Greek exit
preceded and followed by strong contagion. There are three main channels for
contagion: the sovereign, the banking sector and the political situation.
The countries most at risk of material contagion seem to be Italy, Spain,
Ireland (Xetra: A0Q8L3 – news) and Portugal.”

Brian Dennehy, a financial adviser, has already prepared his clients’
portfolios for the FTSE100 plunging to 4,000 by the end of the year. “Our
clients have largely been de-risked for many months,” he said. “In
practice, this means none tend to have more than 20pc in equities. Although
there could be some good news if the FTSE hits these levels, if investors
are unprepared the risk is that they panic into selling at precisely the
wrong time.”

It has been a tortuous few days headlines of Armageddon and the death of
equities will have caused anxiety among investors. They will be asking
themselves whether they should be preparing their portfolios for an exit too.

It is certainly a worrying time. The FTSE has fallen from its March high of
5,966 to below 5,300 in a matter of weeks and with official figures
published last week showing that Britain’s double-dip is worse than first
thought, alarm bells will be ringing in the ears of many an investor.

Yet, many private client managers, stockbrokers and financial advisers remain
remarkably sanguine. Given the uncertainty that has prevailed in markets
ever since Lehman Brothers went to the wall, it is understandable that they
have got used to it and the last thing they want is for their clients to
panic.

Rob Burgeman at Brewin Dolphin (Other OTC: BDNHF.PK – news) said: “As we saw at the back end of last
year, solutions to the euro crisis temporary or otherwise can be
followed by rapid market movements. One can see, already, that while markets
have pulled back from recent highs, it is very far from the kind of
hysterical collapse portrayed.

“Quality companies with robust balance sheets and progressive dividend
policies have shown themselves capable of surviving some pretty fierce
tempests over the last hundred years and, provided that one’s investment
time frame remains appropriate, we would certainly not advocate widespread
selling of investments at these levels.”

Rival firms echo Mr Burgeman’s thoughts. Barclays Wealth, for instance,
although not bullish on equities in the short term, maintains that the stock
market is still an attractive option for savers fed up with low interest
rates and that the returns compensate the extra risk you are entering into
by buying equities.

Oliver Gregson at Barclays Wealth said: “Our most preferred investment is
developed market equities, which we believe will be supported by abundant
global liquidity, valuations and investors’ hunt for yield in a low-return
world. Equities are offering solid compensation for the risk investors are
taking.”

There are several reasons why experts are urging investors to hold firm.

First (OTC BB: FSTC.OB – news) , shares are cheap valuations are at levels not seen since 1980. “The
average multiple of a company’s earnings that a share price represents is
actually cheaper than at any point since the late Eighties,” said Tom
Stevenson at Fidelity. “Only at the bottom of the market in March 2009
were shares much cheaper on this basis than they are today.”

Second, the euro zone accounts for only around 10pc of the overall market
value of global stock markets.

And this leads to a third reason: the US and companies that thrive on US
demand will prosper.

The US recovery is surprising analysts on the upside. It is a point that Alan
Steel, a Scottish-based financial adviser, is keen to make. He highlights
that US exports to the rest of the world are up 57pc over the past three
years; that US property prices are increasing in most areas of America over
the past year by 25pc; and that “our transatlantic cousins” find
themselves sitting on the world’s cheapest natural gas reserves, which will
have a huge impact on their economic future.

Mr Steel said: “Ned Davis Research statistics looking at extremes of
pessimism and optimism back to 1996 showing every peak in either extreme has
been 100pc wrong. In other words, when investors should buy, they sell, and
vice versa.”

The divided opinion leaves investors in a quandary. If Greece leaves the euro
it will inevitably lead to share price falls but this will open up a buying
opportunity.

This is the scenario Mr Dennehy is hoping for. He wants to keep his clients’
powder dry so they can pile back in and pick up even cheaper shares.

“If our longer analysis is accurate, the move to around 4,000 could form
a base that eventually takes us to all-time highs above 7,000,” he
said. “We will then begin to buy funds to benefit from recovery our
shopping list is building in anticipation.”

However, if a solution is found and Greece remains in the euro, the market
will rally so investors moving lock, stock and barrel into cash will miss
out. It is why the overriding message to investors is not to panic and to
step aside from horror stories of Armageddon. They need to take stock of
their situation and act according to their financial circumstances and
goals, experts said.

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How to play the uncertainty
=

Andrew Humphries at St James’s Place Wealth Management said: “Investors
shouldn’t make knee-jerk reactions to the latest news, whether good or bad;
volatility should not be feared.”

We canvassed the opinions of investment banks, stockbrokers, private client
investment managers and financial advisers on how they would play the
uncertainty. Here is what they said.

Oliver Gregson at Barclays Wealth: “Cash remains our preferred
safe haven and government bonds one of our least preferred as we expect the
30-year bull run in this market to come to an end, as there is very little
room for yields to push lower. In conclusion, we are currently recommending
clients to sit tight, stay invested but stay diversified.”

Rob Burgeman at Brewin Dolphin: “For a lot of our core holdings,
the wider economy in the UK and Europe (Chicago Options: ^REURUSD – news) is important, but the growth is
coming from the emerging world and Asia, particularly in the consumer
staples sector where companies such as Diageo (Other OTC: DGEAF.PK – news) , Unilever (Other OTC: UNLNF.PK – news) and Reckitt
Benckiser are focusing on these regions. Even in banking, our core holdings
of Standard Chartered (Xetra: 859123 – news) and HSBC (LSE: HSBA.L – news) have, in our opinion, the correct business
plan in the current environment.”

Simon Marsh at Killik Co: “The safe havens at the moment are
US-denominated assets, so multinationals such as Coca-Cola, Microsoft (NasdaqGS: MSFT – news) ,
Boeing (NYSE: BA – news) , Google (NasdaqGS: GOOG – news) , Amazon and Apple (NasdaqGS: AAPL – news) spring to mind. Norway has the only budget surplus
in Europe and its currency, the krona, is a perceived as a safe haven. One
sector that could throw-up opportunities if countries leave the euro and the
region suffers, is the mining sector. China cannot afford for its economy
not to grow and so we think that China would turn on the tap and this will
boost the miners as it did in 2008.”

Alan Steel at Alan Steel Asset Management: “Long-term sovereign
bond yields such as US treasuries or UK gilts are at the end of a 30-year
bull market. What that means in old money is there’s hardly any room to fall
further. Ask any expert in this area and they’ll tell you, looking out 10
years, they would expect yields to be at least back to 5pc. That’s double
where they are now. So those thinking of piling into these bonds now could
suffer horrendous losses shortly. Meanwhile, high-quality equities are cheap
and good value. The cheapest places to be, where all the bargains are, are
in equities.”

Tom Stevenson at Fidelity: “Investors should ensure that their
investments are well spread between different asset classes, such as
equities, bonds, commodities and cash. Government bonds in Germany, the UK
and US have all performed well during the latest bout of equity volatility
as investors have sought safe havens for their money, providing investors
with an important source of performance. And don’t forget the beauty of
regular savings as it forces you to invest at times like these when the
market has fallen and you instinctively prefer to walk away.”

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