By ADRIAN LOWCOCK 28/04/2010
The Greek tragedy has reared its head again, only a matter of weeks since markets thought that the International Monetary Fund (IMF), Germany and the rest of the Eurozone had put together a package of sufficient magnitude to provide Greece with all of the support it needed.
The crisis in Greece has resulted in their lenders charging the government more to borrow their money, with the current interest rate on Greek debt at 9.6% for 10 year bonds (as of 27th April 2010). This is higher than any other government debt in the world. There are also signs that the contagion is spreading, with the S&P downgrading Portugal at the same time as Greece. Interest rates on government debt are rising there, along with Italy, Ireland and Spain, indicating that lenders want to be compensated more for the risks they are taking to lend to these countries.
What can you do?
It is very difficult to act in these sort of circumstances, when the fear is real, present markets will fall on the concerns and some, if not all, of the worst case scenarios will be reflected in the price of shares. Markets can rebound very quickly if the right action is taken, so investors could lose out by overreacting to short term news. Cashing in corporate bonds and equities would reduce exposure to the fall out of Greece defaulting, but if a bailout works investors may also miss out on a rebound. The solution is to ensure you have a fully diversified portfolio with exposure across a wide range of asset classes. Below are some areas where sovereigns collapse within the Eurozone might be less sensitive:
Gold
Gold is the defensive asset of choice for many investors. It is priced in dollars and therefore you will not be exposed to the euro currency. The fact it is priced in dollars also provides defensive exposure against the euro and is viewed by the world as a safe haven.
Recommendation: Blackrock Gold & General
Absolute Return
These types of funds gained a lot of prominence in 2009 and are designed to provide returns no matter what the markets do. They have lagged and underperformed in a market that has continued to rise, despite what has been thrown at it. However, they will provide some protection against market falls and help investors reduce the volatility of their portfolio.
Recommendation: Standard Life Global Absolute Return Strategies
Asia
Having avoided the worst of the financial crisis, Asia remains highly productive, has low consumer debt and a growing middle class which should continue to provide the area with long term economic growth. In addition, the levels of the region’s currencies look relatively cheap, giving a greater potential for growth.
Recommendation: First State Asia Pacific leaders
What exposure should you have in Europe?
Whist the concerns over Greece are mounting, we do not recommend investors should move away from Europe. Germany has weathered the financial crisis better than others and is by far the largest exporter in the EU. A weaker euro will help its competitiveness with other exporters, such as China or Japan and a recovering US economy will also benefit the German economy. Our view is to retain exposure in Europe and currently we prefer defensively positioned funds.
Recommendation: Cazenove European B
If there is anything you wish to discuss regarding this article please call one of our Investment Professionals on 020 7189 9999.