The concerns are familiar: further falls forcing banks to call in loans to investors who bought shares with borrowed money, triggering waves of selling. So far there have been little repercussions for other markets across Asia. But that might not last if China suffers a major credit contraction.
Nearer home, crunch time – yet another one – has arrived for Greece. The outcome of yesterday’s referendum may be politically decisive for the Greek government. But that is by no means the end of the country’s banking and wider economic crisis. Its economy has been brought to the brink of collapse. Its banks face an onslaught of demands from the Greek public and tens of thousands of cash-stretched companies. A continuing banking crisis, more capital controls, and still looming, a final exit from the euro and a revival of the Drachma, together with a rapid rise in inflation: Greece will be in a state of emergency as far ahead as we can see.
All this puts the 2.49 per cent slide in the FTSE 100 Index last week in some perspective. It has now fallen more than 500 points to 6,585 since its peak earlier this summer, but the loss of 7.3 per cent is not – or not yet – a correction. Neither China nor Europe hold much appeal for investors right now, and China is certainly best avoided until a market floor can be discerned. But what of Europe?
Global confidence in the European single currency has been shaken by the events of the past few weeks, posing searching questions, both on the durability of the single currency and its management. Last week also saw widespread falls in European equity markets, with the Eurofirst 300 down 3.5 per cent on the week.
Given this background it’s hardly surprising the investor optimism of earlier this year has taken a knock. Should investors now give the region a wide berth until there is clarity over the referendum consequentials?
Let’s bear in mind that investing in European stocks has been far from ruinous. It is easy to forget that eurozone bourses are host to some of the most successful companies in the world – Nestle, Bayer AG, Novartis, Unilever, Roche and Sanofi to name a few. These are global trading companies and the Greek imbroglio has had little direct effect on their operations.
As for the larger European-focused investment trusts, it’s possible to argue that Greece hasn’t really mattered that much. Shares in Fidelity European Values have risen 14.2 per cent over the past 12 months and by 112 per cent over the past five years. European Assets Trust, managed by F&C Investments, is up 19.5 per cent over the past year and up by 188 per cent over five.
Is there still an investment case for Europe? It is likely that a massive Greek debt write-off or re-scheduling will keep the euro under pressure. A lower euro would further benefit European exporters, particularly as inflation has remained at near zero levels.
At the same time ECB president Mario Draghi is likely to continue with the bank’s bond buying programme and to pump more cash into eurozone markets to ease fears of a liquidity crisis. And there are now some signs that the economy is – at last – starting to respond. Europe may now be benefiting from what many analysts dub a “triple effect” – quantitative easing driving more money into the system, a cheaper and more competitive euro bolstering exports and a lower oil price which is good news for the consumer.
Eurozone GDP rose 0.4 per cent in the first quarter (1.6 per cent annualised), its fastest in almost two years. This has fed hopes 2015 could mark a decisive year for the eurozone in its efforts to recover from its debt crisis.
However, there are worries that the recovery may not be sustained. Politically difficult economic reforms in France and Italy are needed if sustained growth is to be achieved. You will be hard pressed to find much value in the Europe’s fixed income markets. But the dividend yield on European equities is close to 4 per cent and growing. Today the dividend yields for about 80 per cent of large European firms are higher than their bond yields. Europe’s dividend pool is also significantly larger than the UK’s with a greater depth of stocks. Many European firms are now in a strong position with cash rich balance sheets. So while China may look too scary, my advice on Europe is to hang on in.