6 Things Investors Need to Know About Greece's New Bailout
If the Greek government were a football team, then it just threw a Hail Mary pass to pull out a squeaker, reaching a third bailout deal with eurozone leaders to rescue the country from an all-out economic disaster. But as they say on the gridiron, time out -- as in big time out. If Greece and the European economy at large face uncertainty as they move forward, the last-minute deal poses an equally large quandary for investors, who have little if any precedent for interpreting a situation this dire.
Nor is the deal set in stone, at least yet. The Greek government now must convince lawmakers in Athens to approve tax increases and other unpopular measures by Wednesday or the deal could fall apart.
%VIRTUAL-pullquote-By no means are the problems in Europe over, so investors have to be very cautious in how they invest.%"By no means are the problems in Europe over, so investors have to be very cautious in how they invest," says Jeffrey Sica, president, CEO and chief investment officer of Circle Squared Alternative Investments in Morristown, New Jersey. "They shouldn't have an overwhelming amount of confidence just because there seems to be a solution to the Greek crisis -- in reality, there is no quick fix."
That said, savvy investors might find opportunities even as they avoid some offerings, and consider trimming shares in others. Which ways should you go? As the precarious situation calms down, at least for now, experts offer six investor tips:
Exercise caution with European stocks and exchange-traded funds. By saving Greece, Europe connects its fate to a nation on rickety legs, even as the eurozone tries to climb out of its own deep recession. "Even multinationals that do business in Europe are going to be vulnerable," Sica says. And despite European stocks gaining more than 4 percent in 2014, "they are very vulnerable because the economic fundamentals for recovery have not materialized."
World bond and U.S. equity funds are safe.World bond funds invest 40 percent or more of their assets in foreign bonds. "But the exposure to Greece is 0.3 percent, which is next to nothing," says Ned Gandevani, a faculty member and program director at the New England College of Business in Boston. "And with U.S. equity funds, we're talking about maybe a 2 percent stake. When you look at it from this perspective, the default has close to zero effect on U.S. investors."
Look to U.S. stocks and bonds. Investors across the world -- especially in the eurozone -- will see safety in American markets. "In the trading world, we used to call moves like this a 'flight to quality' as investors spooked by conditions in more exotic markets returned to the good ol' U.S.A. to ride out potential squalls," says Michael Driscoll, visiting professor and senior executive-in-residence at Adelphi University's Robert B. Willumstad School of Business in Garden City, New York. Thus Greece's deep problems "may ultimately be seen as net positives for the more mundane U.S. stock and bond markets."
Expect a stronger U.S. dollar. Gandevani notes that the psychological and political impact of the Greece bailout could see investors flocking to the dollar. "As the pressure is mounting on Greece to give up their sovereignty to eurozone leaders, they have to put aside $50 billion worth of assets just in case there is catastrophe beyond government reach -- and the dollar gets stronger as a safe haven currency."
Watch out for Greece redux. Greece isn't the only European nation in serious trouble in terms of debt as a percentage of GDP. While it's at 160 percent, Italy is not far behind at 141 percent, according to the National Debt Clock. "In terms of the future, this may lean heavily toward Italy taking the same kind of route," Gandevani says.
Absolutely stay away from Greek stocks. The conventional wisdom to buy low and find bargains simply doesn't apply here, so forget it. "I can't see anyone going in there until the smoke clears," Sica says. "Greece will be a bargain again when they get this worked out for the long haul, but the EU is looking to extract as much revenue out of Greece as they can get, and how can they grow under that scenario?"
But just in case you're looking for slick Greek stocks at a premium, the parting shot might as well be this: If you see prices plummet, stock up on Greek olive oil.