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Greek tragedy

The rumblings in Europe appear to be building to a crescendo as the Greek debt negotiations reach a critical phase. Article from Mark Dampier, Head of Research, Hargreaves Lansdown.

UK investors have little direct exposure to Greece, however they do have considerable exposure to Europe, where sentiment is clearly sensitive to the twists and turns of the ongoing Greek saga. UK shares are also susceptible to setback, not too surprising seeing as Europe is our largest trading partner and economic distress over there is inevitably going to ripple across the Channel. Indeed the UK market has followed European counterparts down in the recent sell-off. The Footsie 100 has fallen 5 percent since the beginning of June, as has the Eurostoxx 50 (an index of 50 big blue chip companies in the Eurozone).

We estimate the typical UK pension fund has around 15 percent invested in Europe and around 35 percent invested in the UK. There is £55 billion held in unit trusts investing in Europe, according to Investment Association data. Mark Dampier, Head of Research, Hargreaves Lansdown: ‘Macro-economic events and their consequences are incredibly difficult to call, and you can use up an awful lot of grey matter fretting about Greek debt, US interest rate rises, or the Chinese slowdown. Since the financial crisis in 2008 we have had all sorts of commentators telling us that the end of the world was nigh. In fact the eventual outcome for the global stock market so far has been a six year bull market which many investors have missed because of their worry about these issues.In times of stress like these, it’s best to avoid any knee-jerk reactions. Indeed when there is weakness in stock markets it’s usually the time to buy in, not sell out.

This is particularly the case when cash in the bank is attracting such feeble interest. For what it’s worth my reading of the current situation is the Greeks have lost a key bargaining chip, because a default no longer threatens to bring about a systematic collapse of the European financial infrastructure. The European Central Bank is also pursuing a policy of full-blown quantitative easing of €60bn per month. Any run on the sovereign debt of euro members outside Greece will surely be met by huge buying from the ECB. This, in effect, could safeguard the European banks who have huge amounts of this debt on their balance sheets. An awful lot of commentary on the matter suggests a Greek exit. This may prove correct, though we tend to find that the consensus is often wrong on big macro-economic issues. In truth no-one knows what the eventual outcome will be for Greece, and there will no doubt be continued volatility in financial markets while this all plays out.’

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