Nothing is going right anymore in Greece. Exasperated, the country’s creditors have walked away from the negotiating table. Close to one billion euros were withdrawn from ATMs in one weekend, sign of a spectacular banking panic. People fear they will lack the most basic necessities. What fueled this crisis, of course, is the Greek government, which made a surprise announcement of a referendum so that Greeks could vote on the creditors’ latest proposals, which triggered a real tidal wave.
At the heart of this crisis, the European Central Bank (ECB) decided not to increase the bailout to Greek banks. The government of Greece therefore had no choice but to institute tight capital controls and to close the banks until July 7 due to a lack of liquidity. Consequently, the probability that Greece will leave the euro and do a Grexit (a contraction of Greece and exit) has increased significantly.
On the markets
In the morning of June 29, European stock markets fell sharply, while the decline on the U.S. market was more moderate. The U.S. dollar was up, as was the Swiss franc. Rates in Germany and the U.S. were down 18 and 10 basis points respectively, but were up in the peripheral European countries.
At the same time, the Chinese market was in correction mode, having fallen 20% since the high reached a few weeks ago, which financial analysts consider to be a bear market. The Chinese authorities intervened by reducing interest rates. This bubble is local and should not spill over into other stock markets.
Impact of this area of turbulence on our reality
There is no cause for concern. Professionals’ Financial is relatively well positioned to weather the market turbulence. Here’s why:
- The tactical asset allocation fund is equity neutral (49% stocks) and we have no exposure to Europe.
- Our balanced funds are less exposed to Europe and Asia than those of our competitors.
- We recently increased the duration of the bonds held in our Bond Fund and in our Retirement Balanced Fund.
- The internal Canadian equity strategy is defensive and the relative performance in June is still very good.
- The philosophy and management style of the external managers of our global funds such as MFS, Kleinwort Benson, Acadian, Mawer and Copper Rock should benefit from the current volatility.
- The alternative strategy fund will also benefit from the increased volatility.
This said, we will weigh our options if the stock market situation worsens. We must first determine whether the crisis will spread beyond Greece and have political contagion effects on other euro zone countries in difficulty, such as Portugal and Spain, which will hold important elections this year.
We must bear in mind, however, that the direct economic and financial repercussions for the rest of Europe are negligible, given the small size of the Greek economy.
Although the impact should be limited, we still do not know the exposure of banks or hedge funds on the credit default swaps (CDS) market. If Greece defaults, this could trigger a chain reaction in the financial markets related to credit default swaps and produce instability. The market believes that financiers have learned from the 2008 debacle, but you never know.
We also think that the European Central Bank will intervene if necessary and maintain a sufficient level of liquidity to support the market.
In conclusion, we believe we are well positioned to weather this particular economic situation. Over the past few years, we have paid particular attention to the construction of our portfolios in terms of risk control (security selection and management style, which is based on the quality of the companies and dividends). All of our portfolios have convincing features which, without being completely immune to market downturns, are designed to preserve value in turbulent times.
For any questions on the current situation, don’t hesitate to contact your Wealth Management Advisor.
François Landry, CFA
Senior Vice-President and Chief Investment Officer