Alan Steel: Greece may be hitting some heavy financial turbulence, but don’t hand out the parachutes yet

Published on 26/05/2012 19:10

IF YOU’RE like me, you’ll be fed up hearing about Greece. But it’s been going on for longer than you think, for it was more than two years ago that a former European Central Bank Greek insider said it was only a matter of time before Greece collapsed.

I’ve just spent a fortnight in Ibiza. I went via Palma. We’re told that the Spanish economy is running a close second in the casualty stakes to Greece. Nobody told Palma airport. It was heaving. Ibiza’s doing rather well too. Property prices are holding up and the top end of the restaurant trade is doing well. Everybody, and I do mean everybody, in Ibiza and the rest of the world knows Greece is leaving the euro, bringing down the rest of the eurozone and the world economy. Funnily enough, people who should have a better idea think differently.

The president of Luxembourg was quoted as saying, “We do know the answers but we’re trying to find out a way of delivering a solution and being re-elected the next time around.”

Scot Niall Ferguson, now professor of history at New York University, a man well-known for pessimism, believes this mess will be sorted out, with Greece staying in the euro.

Independent analysts Ned Davis Research don’t see the Greeks leaving the euro any time this year. They also see this as one of the outstanding occasions to buy equities.

Their sentiment indicators confirm their positive views. For example, in the last 16 years there have been 76 occasions when private investors as a crowd have had extreme levels of pessimism and optimism. You can measure this mathematically. In every previous occasion they’ve been wrong. So in other words, when they’re selling they should have been buying, and vice versa.

What do the indicators tell us now? They show extreme pessimism (suggesting it’s time to buy). I saw a headline in Ibiza airport – “The Death of Equities”. Every time they run that old chestnut, it’s a classic sign that a recovery is due. Another classic contrarian sign is the front page of the Economist. The last one I saw depicted the euro getting pushed over a cliff.

But where did it all go wrong for Greece? More than years ago they led the world in philosophy, with folks like Socrates and Epicurus. Epicurus said, “You don’t develop courage by being happy every day – you develop it by surviving difficult times and challenging adversity.” Socrates said, “Understanding the question is half the answer.”

And it was the Greeks who invented the Olympic Games long before that. During all this pessimism you may have forgotten the London Olympic Games will be along soon. Can the Olympics teach us anything about what might happen to stock markets?

An analysis by Ned Davis Research looking at stock markets before and after Olympic Games, going back to South Korea in 1988, is very interesting. The study includes Spain, the US, Australia, Greece and China.

What the numbers show is that in five out of the six cases examined, the host country’s stock market has been down over the three months before the Olympics. They’ve also found in five out of six cases the returns during the Olympic Games exceed the returns for the previous three months. So things begin improving.

But it’s what happens next that’s key. In all six previous cases the host country’s stock market performance has been positive over the following six months once the Olympics are finished. And the outperformance is marked against the global stock arket index. In other words, the host country’s stock market ends up winning more medals for investment performance than elsewhere in the world.

So you can expect to see the UK stock market to be more defensive next month, followed by the beginning of a sprint starting in July, and bursting through the performance tape by the end of the year.

• Alan Steel is chairman of Alan Steel Asset Management