Market Noise

Global markets ignore Greek election result

The victory of left-wing anti-austerity party, Syriza, in Sunday’s Greek election has reignited concerns about the potential for Greece to default on its debts, and the country’s future in the euro. While Syriza leader Alexis Tsipras has expressed the intention to renegotiate the terms of Greece’s bailout, he has been clear that the party does not want Greece to leave the euro. In any event, it is very difficult to try and assess how any state could exit the single currency – there is no legal mechanism for doing so – let alone the impact this would have all on sorts of other factors.

Much of the commentary in recent weeks has been for the potential of contagion – both political and economic – into other Eurozone countries. However, there has so far been little evidence that investors are overly concerned about potential knock-on effects outside Greek markets. During previous stages of Greek political instability, such as in 2011/12, we saw broad-based declines across European – and wider – financial markets. This time, while Greek equities have sold-off sharply and Greek bond yields risen, the response so far in markets outside of Greece has been muted. In fact most European equity markets rose in the days following the result.

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The result itself had been broadly expected on the back of a number of polls carried out in recent weeks, and this may be part of the explanation as to why global financial markets movements so far hardly suggest that investors are panicking or caught by surprise. But the market response (or lack of it) to developments in Greece is encouraging in terms of showing that, despite ongoing uncertainty, investors have been somewhat reassured by indications of genuine fundamental improvement for many European countries (both peripheral and core) since the last eurozone financial crisis in 2011. This, combined with the results of the Asset Quality Review (which showed most eurozone banks to be more stable), and last week’s announcement from the ECB of a huge quantitative easing programme, seems to have bolstered confidence. Investors appear to believe that the eurozone, as a whole, is now better placed to cope with economic problems or political turmoil in any one of its member states.

Our view is that, while this is of course a significant development for Greece, the Greek economy is one small part of the much wider global economy. Therefore, we do not feel this is an issue on which we should change our broader global growth outlook – there are a great many other factors on which to base that assessment.

That said, we should remain watchful for the potential for this situation to once more have a knock-on effect in other parts of Europe – or the rest of the world. Without being able to predict which future scenarios are likely to play out for Greece, and certainly not the markets’ reaction, we can say it is likely that there is potential for significant volatility, the knock-on effects of which could present compelling opportunities in other markets. This is because we should not automatically expect domestic issues in Greece to have a long-term impact on other countries, so long as fundamentals in those countries remain supportive.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.