Europe goes left, market goes south: Where do we go next?
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In the past few weeks, Europe has taken a hard left turn as voters voiced their resentment at government austerity measures and switched their votes to socialist parties who promised to renegotiate austerity packages and bring back social programmes.
In France, Francois Hollande defeated the incumbent president Nicolas Sarkozy and became the first French socialist president since Francois Mitterrand 17 years ago.
In Greece, the election results were less conclusive. With rapid gains in popularity of the radical left Syriza party, the Greek election results were so fragmented that none of the political leaders were able to form a coalition government, and Greece will go to a second election in mid-June. Syriza is a hard left, anti-bail-out party whose election campaign includes extreme proposals such as a rejection of the austerity measures imposed on Greece as a condition to the bail-out fund. Some opinion polls suggest that Syriza will gain more votes and come out on top in the new election.
The prospect of Syriza leading the new Greek government triggered a sell-off in stock markets around the world as investors feared that its anti-bailout stance would result in a severing of international aid and eventually lead to Greece’s forced exit from the euro. The SET index slid 4.6 per cent, in-line with the MSCI World index which dropped 4.8 per cent in one and a half weeks after the election. Asian stocks were hit even harder with the MSCI Asia Pacific ex Japan index losing 8.4 per cent.
Where now?
Uncertainties in Greek politics will continue to weigh on the markets in the coming weeks. On Monday, for instance, Asian markets rose after a Greek poll indicated a victory for pro-austerity conservatives.
However, we expect to see a compromise solution emerge, as a Greek exit would be catastrophic for both the European Union and Greece itself. If Greece chooses to abandon the euro and reintroduce its local currency, it would have to swap all domestic contracts and debts and convert existing bank accounts to the new currency. For Europe, European banks would suffer more losses from Greek government bonds as the country negotiated to pay them off with a new currency that would depreciate significantly against the euro. Investors would lose confidence in the euro and pull money out of the other troubled euro-zone members such as Ireland and Portugal, triggering another round of the credit crunch we saw in 2008 when Lehman Brothers collapsed. For Greece, the result would be even worse. Greeks would see their wealth wiped away because the new currency would be worth a fraction of the euro. The potential for loss of wealth would cause depositors to withdraw funds from banks, causing Greek banks to collapse. The price of imports including necessities such as oil would shoot up, causing high inflation. And without the bail-out money coming in, the Greek government would not have enough funds for the growth projects they have promised.
We believe that Greece’s aggressive stance is only an attempt to gain an upper hand at the negotiation table – when push comes to shove, both sides will back off and try to strike a deal to avert a new round of global financial crisis.
Last month we argued that the SET Index valuation was stretched and advised clients to reduce stocks holding. With this correction, we believe the SET Index is becoming more fairly priced and advise investors to start accumulating stocks at a SET Index level of around 1,150. We also like the Asia-Pacific (excluding Japan) market for its strong fundamentals, good growth prospects and undemanding valuations.
Komsorn Prakobphol is wealth manager at Tisco Asset Management. He can be reached via www.tiscowealth.com or [email protected].
