What now for Greece?

Mike Hugman, Strategist, Emerging Market Fixed Income, and Philip Saunders, co-head of Multi-Asset, Investec Asset Management.

It appears that the Greek people, given a choice in yesterday’s referendum between EU-imposed austerity and the risk of exiting the euro zone, voted for the latter.

What happens next is not immediately clear, but ultimately, we believe, not as material as other issues facing financial markets such as US monetary policy and Chinese growth. Furthermore, as we expressed in our article last week, we believe the contagion risk of a Greek exit from the euro zone is limited, with the European Central Bank now in a strong position to act if required and European banks having de-risked. This is evidenced in a so far muted market response to the No vote. We remain focused on understanding and tracking the possible channels of contagion from events in Greece to global markets.

A Greek exit from the euro zone appears therefore widely priced into markets, and is one of our two short term scenarios outlined below. We should reiterate that it is still not clear exactly what ‘Grexit’ would entail anyway. German officials have even talked about a “temporary” exit by Greece, with an interim period where a second currency in the form of IOUs is introduced before Greece re-enters.

As far as our positioning is concerned, we have no direct exposure to Greek assets in any of our emerging market fixed income or multi-asset portfolios. Within the bond markets of the neighbouring Central & Eastern Europe region we are positioned defensively.

Short term scenarios for Greece