A Grexit Everyone Saw ComingJune 30, 2015
But now things are getting serious quickly. With a 1.5 billion Euro default looming, Prime Minister Alexis Tsipras has called for a July 5 national referendum on restructuring proposals from the nation’s creditors. In the meantime, he has closed the banks and the stock market and imposed capital control, restricting ATM withdrawals to 60 Euros per day. With a possible “No” vote on the referendum, Greece seems closer than ever before to taking the unprecedented step of exiting the Euro Zone.
What does this mean for investors?
Globally-diversified portfolios likely have very minor direct exposure to Greece. Greece was downgraded from a Developed Market to an Emerging Market in 2013, and currently represents just 0.34% of the MSCI Emerging Markets Index2. A portfolio with 5% allocation to Emerging Markets would have a total portfolio exposure of just 0.02%. Similarly, because Greek government debt has been downgraded several times in the last few years and is now barely hanging on to the bottom of junk bond, investors who focus on higher-quality bonds should have almost no direct exposure to Greek debt.
Developed stocks generally sold off at the start of this week, with major indices declining around 2%, seemingly an acknowledgment that Greece likely leaving the Euro is not a good thing, but certainly not a surprise. The Euro fell sharply following the referendum news on Sunday, yet by Monday afternoon had recovered all of its value and then some against the US Dollar. The Euro has risen roughly 5% against the US Dollar since mid-April.3
What lies ahead?
The biggest worry about a possible Grexit hasn’t ever been the impact of Greece leaving the Euro, but the possibility of other EU members following suit, especially Spain, Portugal and Italy. Government bond yields rose in those countries following the news, though didn’t spike as drastically as in previous Greek dramas and still sit at very manageable levels. Additionally many countries within the EU have had ample time to prepare for the possibility of such an event, reducing their exposure to Greek debt and making other contingency plans. A Grexit in 2015 would likely be significantly smoother than it would have in 2009 or 2011.
Much of investing centers on the rate of return required for investors to shoulder certain risks. With the perceived risks of Greece, the EU and the greater world economy taking on a wider spectrum of unknown outcomes, it’s natural to expect a bout of volatility. How long it lasts or the severity of its impact is anyone’s guess. One thing we do know for sure is that this time is not different. More countries will default in the future and each time shockwaves will come. But if we can stay invested in a diversified portfolio that aligns with our risk profile, chances are we’ll still be on track to reach our goals, regardless of the bumps in the road.
Diversification neither assures a profit nor guarantees against loss in a declining market.
All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.
2Morningstar Direct 2015, MSCI Emerging Markets Index
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