DIRECT risks are low but knock-on effect of Greek drama is harder to predict, writes Jeff Salway
Investors with diversified portfolios have nothing to fear from events in Greece, experts say, despite growing anxiety ahead of a referendum that could take the country closer to a euro exit.
Global and European stock markets have been skittish amid ongoing uncertainty over the outcome of prolonged negotiations between Greece and its creditors.
The latest crucial stage comes tomorrow, when the country votes on whether or not to accept the austerity measures proposed by the EU and the International Monetary Fund (IMF) in exchange for further support.
A vote against the proposal would make a “Grexit” more likely, although several other scenarios could play out in the event of the deal being rejected.
“However, it is not yet clear what exactly will happen to Greece, even if the people vote no,” said Adrian Lowcock, head of investing at Axa Self Investor. “It is this lack of certainty that causes most concern amongst investors as it is harder to make rational investment decisions.”
With the financial crisis fresh in the memory and clouds hanging over other European economies, anxiety and even panic among savers and investors is “rational”, according to Harry Morgan, chief investment officer at Anderson Strathern Asset Management.
“It is one thing for stock markets to take a dip, but when the stability of the banking system is in question, people are prone to panic. Recent history has provided vivid examples of the corrosive effect of a collapse in confidence,” he said, pointing to the September 2007 run on Northern Rock and the losses suffered by bank depositors when the Bank of Cyprus used their cash to shore up the country’s banking system in 2013.
“So, the Greek financial crisis carries real resonance, and reminds us that cash is not necessarily a safe asset. UK depositors’ cash balances are only guaranteed up to £85,000 with any one institution,” said Morgan.
“As ever, diversification remains vital for large cash investors, even if it means the inconvenience of operating several bank accounts.”
The referendum is unlikely to have a significant short-term impact on the equity and bond markets to which ordinary UK investors and pension savers are directly exposed, whatever the outcome, said Tom Stevenson, investment director at Fidelity Personal investing.
“Greece’s economy is small in European terms and even smaller from a global perspective. It does not really move the dial from a purely economic perspective,” he said.
The drawn-out nature of the Greek saga means investors are largely prepared for the current events, he added.
“This means that almost no Greek debt is held outside the official creditors. Private lenders have almost no exposure to Greek bonds. Equity investors, too, won’t have been caught short by the slow unfolding of this drama. If they didn’t want to hold Greek shares they will have got rid of them long ago.”
Not everyone is convinced that investors have prepared for the ramifications of a no vote, however. One leading fund manager suggests that a ramping up of uncertainty over the future of the eurozone could wipe 15 per cent off equity markets in the euro area.
The uncertainty for investors is now largely over the extent to which events in Greece will affect other “peripheral” economies to which many investment and pension funds do have exposure, such as Italy and Portugal.
Graham Spooner, investment research analyst at The Share Centre, said: “Longer-term investors are unlikely to be panicked by the situation, but should be aware that markets could be entering uncharted waters. The greater concern may be over the possibility of contagion into other countries.”
That makes it essential for anyone with shares or collective investments to have their holdings spread across different assets to spread the risks.
“Investors should make sure their portfolios are well-diversified, have a sensible balance of assets and are spread around the world’s markets,” said Stevenson. “The short-term outlook is unknowable but the long term has always rewarded deep breaths and calm thinking.”