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Wells Fargo: Europe Still Worth A Look Despite Greece
Aspire, Investments | 29 May 2015
By: Lim Si Jie
Articles (169) Profile

Dark clouds loom over the debt crisis in Greece as the Greek government runs short on cash. Although the Greek government was able to come up with the €1 billion, it needs to settle its interest payments with the International Monetary Fund (IMF). The repayment due in June is a daunting challenge at hand for the Greeks.

Wells Fargo believes that the most likely scenario is one in which the Greek government is able to undergo adequate reforms to persuade both its European partners and the IMF to not only release the final portion of the current bailout program but also agree to further bailout in the future.

Greek Default A Lose-Lose Scenario

It is clear that neither Greece nor the rest of Europe is keen in Greece’s possible default, or even potentially leaving the Eurozone. However, it might be too optimistic to even say Greece will have a tough time, considering Greece’s substantial debt.

There is a tremendous amount of “bad blood” between the Greek government and some of its European counterparts, and political constraints could cause the two sides to fail to reach an agreement.

Despite Wells Fargo’s confidence that an agreement will eventually be reached, Wells Fargo warns that the probability of Greek default and exit from the Eurozone is higher now than it has ever been in the past.

Financial Markets Outside Greece Unaffected For Now

So far, financial market turmoil had been largely limited to Greece. The yield on the ten-year Greek government bond has risen 600 basis points (BPS) since last October. In contrast, yields on comparable securities in Italy and Spain remain low.

The Greek stock market continues to languish at its 2015 lows, but stock markets in other European countries have rallied sharply this year because of the European Central Bank’s (ECB) Quantitative Easing (QE) policies.

Contrary to Wells Fargo’s prediction, the market is optimistic about Greece not defaulting and will remain in the Eurozone. Even in the event of a default, the market believes that Europe has enough backstops in place to prevent contagion.

Volatility To Follow If Greece Defaults

Wells Fargo warns that a Greek default and exit from the Eurozone would lead to volatility in other financial markets for a period of time. However, the duration of the volatility remaining in the market is an open question. Investors should continue to pay close attention to developments in Greece.

Manufacturing PMI Falls Below Estimates

In the earlier part of the year, manufacturing and service sectors’ Purchasing Managers Index (PMIs) have both been trending higher. Analysts on the street are expecting for these trends to continue in April. However, both PMIs edged lower despite positive forecasts.

The manufacturing PMI in Germany fell in April. In France, the manufacturing PMI remained below the dividing line separating expansion from contraction for the twelfth consecutive month.

However, one month of lower PMI figures does not necessarily make a trend. The position of the Eurozone PMIs being above 50 suggests that positive growth has continued into Q2. Moreover, the separately reported Ifo index of business sentiment rose in the same month manufacturing PMI fell.

No Worries Of Inflationary Output Gap

Overall, recent economic data from European countries (excluding Greece) suggest that foreign economic growth had remained positive so far in 2015. However, economic growth does not appear to be strong enough at present to cause a significant rise in global inflationary pressures.

Similar to the US, QE will continue to drive stock prices higher as the large influx of printed money enters financial markets. Investors can look to ride on the trend with Exchange-Traded Funds (ETFs) that mirrors major European indexes such as DAX or CAC 40 after recent pullbacks in prices.

However, a close monitor on the Greek default situation is still key for investors who are eyeing the European markets.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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