Uncovering investment opportunities amid Greece’s debt crisis

Despite ongoing market jitters over Greece’s probable exit from the euro zone, investors who are willing to take risks can profit from the turmoil in Europe. Buying assets on the dips is a way of doing that, analysts and traders tell.

Greece was given a Sunday deadline by European leaders to accept a rescue or face a possible exit from the euro zone. Patrick Seeger / EPA

As Greece’s debt crisis drags on, we asked analysts and traders for their views on the best investment opportunities at present.

The common theme that emerged is that with the uncertainty surrounding Greece, investors would do well to buy on dips.

Whatever the outcome, investors who are not averse to taking risks will still be wading into stocks, bonds, equities, currencies and precious metals such as gold.

In or out?

The questions on everyone’s mind are: What happens to Greece? Will it remain in the euro or leave?

Analysts remained divided.

“The risk of a Greek exit from the euro has increased dramatically following the misguided No vote at the weekend,” said Ole Hansen, the head of commodity strategy at Denmark’s Saxo Bank.

Vineeta Mahnot, an equity research analyst at Hem Securities in Jaipur, India, thought otherwise. “Although the Greeks have voted no in the referendum, it won’t be easy for them to stay away from the euro. If they opt for an exit, then the situation will worsen for them as inflation would spike up along with economic instability,” she said.

Christian Gattiker-Ericsson, the chief strategist and head of research at the private bank Julius Baer, voiced a similar opinion. “Yes, we assume there is a vital interest on the part of Greece to remain in the euro. However, we might see even further escalation after the no vote before a deal is struck.”

Others such as Pradeep Unni, the head of trading and research at Richcomm Global Services in Dubai, were unsure.

“It’s a tough call to make at this point of time. Going back to an independent currency will be a mammoth challenge to deal with, especially when the nation reels under massive unemployment and other financial issues,” he said.

Bank of America Merrill Lynch said a lot of mutual pride-swallowing was needed to avoid Greece’s exit from the euro zone.

“To public opinion in core Europe, already tempted by throwing Greece out of the monetary union, the ‘big no’ may be seen as the last straw,” said Gilles Moec, Bank of America Merrill Lynch’s head of developed European economics.

“Offering concessions now would be seen as weakness, handing Alexis Tsipras a victory that may resonate throughout the periphery. Finding a solution that keeps Greece in the monetary union would require the acceptance by the Europeans that more fiscal efforts have to be matched – not ‘preceded’ – by explicit debt relief.

“For a deal to work, Germany has to acknowledge that it cannot dither on debt relief, and Tsipras must give up his fiery rhetoric, and probably rejig his coalition to let ‘pro-programme’ parties in. That’s a lot to ask in a short time span.”

Following the referendum vote and the resignation of Yanis Varoufakis, Greece’s finance minister, the British bookmaker Ladbrokes lengthened the odds on Greece leaving the euro zone this year to 7/4 and shortened the odds of it staying in the currency bloc to 2/5.

Those odds imply a roughly 60 per cent chance that Greece will stay in the euro this year and a 40 per cent chance of Grexit.

Stocks

Most analysts expect European equity markets to remain volatile until a solution to Greece’s debt is found.

“European stocks are prisoners of the Greek situation until further notice,” said Mr Gattiker-Ericsson.

But despite this, he said equities offered the best opportunity right now, especially companies in the consumer, healthcare and technology sectors.

Mr Hansen agreed. “Investment sentiment has been dented by the ongoing crisis between Greece and its creditors. Until we see a solution, equity markets will remain volatile, not least considering the time of year when investment appetite is already reduced due to the summer holiday season,” he said.

However, the decline of European stocks has been limited since the Greeks voted “No” in Sunday’s referendum, rejecting the austerity measures demanded of them in return for bailout funds.

“European stocks, especially banking stocks, remain under pressure from the uncertainty and current lack of clear solutions,” said Mr Hansen.

The Euro STOXX 50 index of euro-zone blue-chip shares has fallen 1.2 per cent since Monday and was trading at 3,322.36 yesterday afternoon.

A Reuters survey conducted late last month found that the index was expected to end the year at 3,794 points.

Gold

Mr Hansen said that gold had struggled to attract buyers throughout the latest escalation in the Greek crisis and that had sharply reduced investors’ perception of gold as a safe haven.

Market speculators such as hedge funds are the least bullish they have been since October 2006, while total holdings in exchange-traded products backed by physical gold is close to the lowest level since 2009.

“Near term, the risk is pointing towards lower levels but we view the $1,080 to $1,130 area as a buying opportunity and maintain our end of year call at $1,275,” said Mr Hansen.

Gold’s upside has been hurt by the prospect of higher US interest rates this year, which would boost demand for dollars and increase the opportunity cost of holding the metal.

Gold was trading at US$1,153.88 an ounce yesterday. It is down just over 1 per cent for the year.

Mr Gattiker-Ericsson supported the bearish view. “Whenever a currency break-up is at stake, gold should react when measured in this currency. But not even when measured against the euro has gold been up in the past few weeks,” he said.

But others differed on this.

“Now that the Greece crisis has acutely questioned the euro’s stability, gold is well poised to reoccupy its position as an alternate currency to the US dollar,” said Anand James, the co-head of technical research at Geojit BNP Paribas in Kochi, India.

“Despite India’s gold, bonds may divert some of the investment-oriented purchases, but it is likely that as the economy improves, jewellery consumption is likely to increase.

“Thus, on both these grounds, gold is poised to see gains, and looks a good bet at this point. However, the sustainability of its price gains may closely depend on the pace of Fed rate hikes.”

Mr Unni said he thought gold was an ideal investment amid the current uncertainty.

“Predominantly gold gains on dollar weakness or amid financial instability and the current situation will support the metal well,” he said.

“Many investors and hedge funds are reported to be flocking into gold on fears that deteriorating public finances and ballooning national debt of major economies can undervalue the current monetary set-up. Its impact on the peripheral euro zone, which is carrying similar debt problems, will be sufficient to take the metal higher.”

Bonds

With Greece given time until Sunday to come up with a proposal to keep it in the euro zone and the relentless hammering of Chinese stocks over the past four weeks, during which they have lost more than 30 per cent of their value, investors are showing an appetite for bonds.

Yields on the 10-year Chinese treasury bond fell 10 basis points (bps) yesterday at the start of trading as investors sought the safety of government debt.

Other bonds perceived as having strong government backing have also performed well in recent days.

Yields on five-year policy bank bonds and debts (carrying a five-year tenor) issued by local government financing vehicles are both down about 20 bps since the end of last month.

Although German 10-year bund yields, which set the standard for euro-zone borrowing costs, dropped a basis point to 0.63 per cent, 10-year bond yields fell between two and three basis points to 2.26 per cent in Spain and Italy and 3.14 per cent in Portugal.

“In this environment we are seeing risk-off hitting all sectors with the exception of core bonds from countries such as the US, Germany and Switzerland. Core bonds therefore offer the best potential as an investment,” said Mr Hansen.

Mr Gattiker-Ericsson agreed, saying that “bonds in Europe, however, get increasingly interesting after the recent moves there”.

Currencies

Analysts expect some limited euro weakness, but this is unlikely to sustain for long.

“In the coming months the market focus is likely to shift to the US elections and the possible uncertainty of the next US leadership and policies. The euro should be trading in the range of 1.09 to 1.12 [against the dollar] for the rest of the year,” said Mr Unni. Julius Baer projects 1.08 on a three-month basis and 1.15 on a 12-month basis.

The euro was trading at 1.1028 against the dollar yesterday and is down 6.3 per cent so far this year.

Should investors want to avoid risking potential losses, Mr Hansen suggested keeping investment positions light until either a solution to the debt crisis in Greece is found or “we get closer to September when investment decisions tend to pick up again”.

* with reporting from Reuters

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