So, Greece has decided: it’s a fat big “NO” to the terms of the bailout package proposed by its creditors.
My quick take? Short-term weakness in the FTSE 100 is an opportunity too good to pass up for savvy investors. Here’s why.
FTSE 100 Down
The last 10 days of trade have been revealing.
Since 27 June, when the Greek government asked its citizens to vote on a bailout package (whose terms essentially are no longer valid), the FTSE 100 has lost 3% of value. Greek affairs are important, but they are only party to blame for its weakness — yet the same does not apply to other indexes in “Euro-land”.
Germany’s DAX and France’s CAC 40 are flat while markets in Italy and Spain have underperformed ever since Greek lawmakers authorised Alexis Tsipras’ bailout referendum eight days ago. (The yield curves of Italy and Spain are more important than stock prices there to gauge the risk of contagion.)
But consider the last three months of trading, during which the DAX and the CAC are down 10.3% and 8.4% respectively. That compares with a -6% performance for the FTSE 100 — by far today’s best performer on this side of the Atlantic.
Meltdown
Before the 30 June deadline — when Greece should have repaid €1.5bn to the International Monetary Fund — many UK traders had suggested a meltdown scenario, according to which the FTSE 100 could have plunged by 10% or more in the wake of a negative outcome between Greece and its creditors.
In Europe’s bond market periphery yields have barely changed since 27 June, and it doesn’t look systemic risk has heightened in the wake of the recent “no” vote from Greece.
It’s easy to argue now that if volatility in Europe persists — which is pretty damn likely considering the way politicians have handled the situation over the last four years — investors will look for safer options elsewhere.
Then, at its current valuation, the FTSE 100 remains the most obvious defensive play in this part of the world.
“Peak To Trough” Research — Broker
Some of its main constituents continue to face an uphill struggle, yet you should not lose faith in the main index.
Research published today by Exane BNP Paribas investigates the impact of different shocks for different sectors across Europe since the crisis crunch started in 2007/2008 , evaluating the performance of several equity investments.
As one would imagine, the “average sector relative performance through Europe’s risk events” shows that the banks, insurance companies, basic resources, utilities and oil & gas clearly underperformed more defensive sectors such as food & beverage, healthcare and retail.
The good news here is that, across the spectrum, your UK holdings may not have appreciated much in recent times, and that’s because many industries are still in restructuring mode — take miners and supermarkets. But then the shares of certain oil majors and utilities could be had at bargain prices.
Macro
Based on the economic landscape (job market, inflation, interest rates expectations, indebtedness), signs of better times to come are evident, and the FTSE 100’s performance versus other indexes signals that investment risk is low in the UK.
On 2 July, this headline from Reuters — “Miners and BP push Britain’s FTSE higher” — caught my attention, and that’s exactly what you’d want to see in future weeks if you are invested in the UK.
“The real problem, though, is China, where stock market volatility has come back with a vengeance,” one senior banking source told me today.
In fact, expectations on China are going to weigh more on the FTSE than on any other indexes around Europe.
That could be soon forgotten, however, if interest rates rise sooner than expected.
Recent macroeconomic readings point to that direction.
