· The Greek electorate has chosen to reject the bailout proposal from their Eurozone partners.
· This comes on the back of the Syriza government demanding a substantial haircut to Greek debt and a reduced austerity program and this demagoguery has translated into the ‘yes or no’ argument.
· Greek Finance Minister Yanis Varoufakis has resigned after being made aware that his presence in any negotiations would be a hindrance.
· Euro/Dollar is down but not by much.
· Major European indices (FTSE 100, DAX etc.) opened lower but not as sharply as some expected.
· The Eurogroup will meet tomorrow (7/7/2015) to discuss the rejection of the bailout terms.
Stephen Peak – PM of Henderson International Opportunities & Henderson European Focus
The market reaction to the weekend news was rather grown up. Markets are down, but modestly. Investors remain confident that this does not get out of control and is for the most part contained. Europe and the Eurozone are in a very different position today with recovery very evident in e.g. Spain and Ireland - two countries that were part of the “periphery mess” but have embraced tough decisions and are growing strongly, albeit from a low base.
We will have to navigate carefully for a while as politics collide with economics, but it remains my view that ex-Greece the European markets would be higher as the broader fundamentals of healthier economies and corporates are attractive. As for the Euro it has been a little weaker but no sharp move – I suspect that the global positioning (very long US Dollar) might have something to do with this.
Any sharp, unjustified downward moves may present opportunities and entry points to exploit. I am and intend to remain fully invested.
Paul O’Connor – Co-Head of Henderson’s Multi-Asset Team and Co-Manager of the Henderson All Asset Fund
The decisive victory for the ‘no’ camp in this weekend’s Greek referendum has taken most people by surprise. Greece has taken a big step closer to ‘Grexit’ and a big leap into the unknown. This is a game-changer for Greece – if the situation is mishandled, it will also be a game-changer for the Eurozone. Policy makers and politicians have critical decisions to make in the days ahead. Investors will naturally be on edge until the picture becomes clearer.
What happens next in Greece?
The immediate impact of the referendum will be to greatly intensify financial and economic pressures in Greece. Now without a bailout, Greece will struggle to find the cash to pay for pensions and public sector wages. The government’s only option may be to make these payments in some form of IOUs in the weeks ahead.
The health of Greek banks will continue to deteriorate rapidly even with continued European Central Bank (ECB) support, and more dramatically if that is capped or reduced. Press reports over the weekend suggest that some banks are within days of running out of cash – other reports warn of imminent haircuts to deposits, to support a bank recapitalisation. Against this backdrop, depositors will be increasingly desperate to get their money out of the banks, which means that the authorities will have to continue to limit access to withdrawals through bank closures and capital controls – and might well have to tighten restrictions further.
Although more than 60% of Greek voters should be happy that they got the referendum outcome they were looking for, the result will do nothing to alleviate the grim living conditions they face in the days ahead. Closed banks are only part of the problem. Greece is already experiencing shortages of food, medicine and other essentials and a big drop in tourist bookings. It would not be a surprise to see major social unrest.
How will Europe respond?
The developments of the last few weeks have severed much of Greece’s access to the Eurozone financial assistance that has been keeping its economy functioning. While the country exercised its democratic authority in holding the referendum, the response of the rest of the Eurozone will play a major part in determining Greece’s economic future. The ECB’s reaction will be hugely important, both this week and beyond. Any decision to withdraw liquidity assistance to the Greek banks in the days ahead would push some into bankruptcy. While we think that the central bank will show leniency in the near term, 20 July will present a more challenging decision for the ECB. That is when Greece is due to pay the central bank €3.5bn – money that the Greek government will not be able to find without some bailout assistance. If Greece defaults, the ECB is likely to restrict liquidity assistance to the Greek banks, potentially leaving Athens with no option but to print its own money, thereby pushing Greece closer to ‘Grexit’.
Although the Greek government has spoken positively about the prospect of getting another bailout from the Eurozone in the near term, reaching a deal will be very challenging given the hostile tone of recent discussions and the lack of trust on both sides. The scale of the deterioration in the Greek economy in recent weeks means that Greece now needs a bigger bailout than the one it rejected a few weeks ago and it needs it urgently. It will be difficult for many Eurozone leaders, particularly in those countries where anti-austerity parties have been gaining support, to advocate a deal on that scale so quickly, without alienating their domestic voters. Still, this morning’s resignation of Greece’s adversarial finance minister, Yanis Varoufakis, should be seen as a symbolic gesture of conciliation from Greece that might help to improve the tone of the discussions. The meetings of the German and French leaders today and Eurozone finance ministers on Tuesday will give important insights into how the process will develop from here on.
Impact on financial markets
Unsurprisingly, the first reaction from financial markets has been a pick-up in risk aversion. Greek bonds and equities have fallen sharply, but elsewhere equities have seen quite modest falls and bond spreads for other peripheral economies within the Eurozone have widened only slightly. Overall the response has been relatively subdued with investors wary of, rather than immediately worried about, a wider euro crisis.
At this stage, we see the Greek referendum as more of a one-off shock to European markets than a major systemic crisis. Greece is small – less than 2% of Eurozone GDP – and direct private sector exposure to Greece is modest. Furthermore, the ECB is much better equipped to stem contagion than it was in 2011-12 and is likely to react forcefully if market turbulence leads to a warranted tightening of monetary conditions. Still, given that few investors constructed their portfolios with a Greek ‘no’ vote in mind and most are likely to be reducing risk at this time of the year, we think it is right to remain cautious until this fluid, fast-changing situation has been more clearly resolved.
Simon Ward, Chief Economist at Henderson Global Investors, adds his thoughts on the fallout from the Greek referendum on Sunday
The comfortable “no” majority – the opposite result to that predicted by betting markets – will, at least, serve to accelerate the conclusion of the crisis.
The priority of the Eurozone authorities will shift from securing a deal with Greece to protecting other Economic and Monetary Union members from financial contagion. This could involve an expansion of quantitative easing, a political commitment by leaders to implement the recommendations of the recent “five presidents’” report on strengthening monetary union, and financial guarantees against any European Cental Bank (ECB) losses on its Greek exposure. Such measures would support markets.
The Eurozone authorities are very unlikely to agree a softer bail-out deal with up-front debt relief, as promised by PM Tsipras to his electorate. Without a deal, the ECB will be unable to maintain its current level of liquidity support to Greece without Eurozone guarantees against losses, let alone increase it. Banks will run out of cash in days, further increasing economic hardship. The government’s popularity may unravel swiftly, leading to new elections, perhaps triggered by the resignation of the Greek president.
The liquidity crunch is likely to force the government to pay bills with electronic IOUs, possibly as early as 12 July when public sector wages are due. These would trade at a large discount and their introduction could further undermine government popularity by raising fears of Grexit. Despite the “no” majority, polls indicate that support for the euro is at a record high.
The choice facing Mr Tsipras, therefore, is to accept a deal similar to the one he rejected 10 days ago or risk his popularity imploding along with the economy. Events are moving fast and a prolonged “Grimbo” (Greece in limbo) – Greece remaining in the euro but with the banking system and economy in lockdown – is unlikely.
Our assessment remains that wider market implications of the Greek crisis will be limited by a supportive global economic / liquidity backdrop and the determination of the Eurozone authorities to prevent contagion.
International investing involves certain risks and increased volatility not associated with investing solely in the US. These risks included currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. The Funds may invest in securities issued by smaller companies which typically involves greater risk than investing in larger companies. The Funds are non-diversified and therefore the change in value of a single holding may have a more pronounced effect on the Fund’s performance. Also, the Funds may invest in limited geographic areas and/or sectors which may result in greater market volatility. In addition the Funds may invest in derivatives. Derivatives involve special risks different from, and potentially greater than, the risks associated with investing directly in securities and may result in greater losses. The Funds may be subject to frequent trading which may result in a turnover rate of 100% or more. Asset allocation strategies do not assure profit nor protect against loss.
One should consider the investment objectives, risks, fees and expenses of any mutual fund carefully before investing. This and other important information is available in the Fund’s prospectus and summary prospectus available at Henderson.com. Please read it carefully before investing.
The views in the summary were those of the individual as the date referenced and may not reflect the views of the manager on the date the material is first published or anytime thereafter. The views do not constitute investment advice. This should not be considered as an offer to sell or a solicitation of an offer to buy securities mentioned herein. Portfolio holdings and allocation may change at any time. Holdings are subject to change and current and future portfolio holdings are subject to risk. To view the current holdings for each Fund please visit our website at henderson.com.
Not FDIC insured, not bank guaranteed, and may lose money.
Foreside Fund Services, LLC, distributor (07/15) HGF-56364-15
