Don’t Bet on the Outcome of Greece’s Election

by Dan Burrows | June 14, 2012 1:00 pm

Greek stocks soared Thursday in anticipation that pro-austerity forces will prevail in this weekend’s make-or-break elections — but back here in the U.S. investors had best just stay frosty and stand pat[1].

Yes, a victory for the New Democracy party on Sunday will be taken as a Greek commitment to the euro and the European Union’s harsh bailout terms. Markets in the U.S. and overseas will likely rally sharply to kick off next week, and anyone long on equities will enjoy the gains.

If, on the other hand, the anti-austerity Syriza party garners enough support to form a government, global markets will likely get routed on Monday. Anyone short stocks will see a payday. And as for the rest of us, well, our retirement plans will take more beatings.

See InvestorPlace’s full coverage of Europe in Crisis[2].

But unless you’re a trader — a sophisticated professional who’s able to move in milliseconds, employ leverage and hedge complicated bets — betting on the outcome of the Greek election is like the third rail: Do not touch. That’s to say, if you’re an investor — someone with horizons that extend over months if not years — don’t make any changes to your strategy or directional bets based on what may happen in euroland this Sunday.

Greece doesn’t allow voter polling in the two weeks heading up to an election, so there’s no official data to suggest the outcome, but so-called secret polls point to a victory for New Democracy. That explains the 10% rally on the Athens Stock Exchange.

However, even if you go long and bet right on a pro-euro outcome, any gains will probably be short-lived. After all, the half-life on such positive market action is getting shorter and shorter. Recall that the U.S. market’s pop following Spain’s bank bailout[3] didn’t even last one session before serious doubts crept back in. Spain’s and Italy’s borrowing costs almost immediately soared to unsustainable highs.

And although the implications for the euro are almost unthinkable in the event of a win for Syriza, a New Democracy victory hardly puts the crisis behind us. Euroquake will keep rumbling for the foreseeable future in either event.

As InvestorPlace’s Jeff Reeves writes, unless you are a very active trader looking to pinpoint specific areas of risk and opportunity, there’s little to be gained from having your eyeballs glued to the eurozone headlines[4]. The fact of the matter is that despite the many moving parts and varied scenarios, there are really only three ways the EU debt crisis can end: survival, partial breakup or collapse. And all are fraught with uncertainty and will play out over a long period of time.

Besides, outside of Treasurys and perhaps the most defensive stock sectors[5], there may be no place to hide if the euro touches off a full-blown credit crisis.

So if you’re a reckless gambler with money to burn, sure, you could place a directional bet on the Greek election. It’s a binary outcome, after all, as in roulette: Bet on red or bet on black. Hey, it’s a trade.

But prudent, long-term investors best stand pat. The eurozone will remain fragile regardless of Sunday’s results. Political intransigence and contagion fears mean the market faces plenty more rounds of roulette — Russian roulette — for months or even years to come.

  1. stay frosty and stand pat:
  2. Europe in Crisis:
  3. Spain’s bank bailout:
  4. there’s little to be gained from having your eyeballs glued to the eurozone headlines:
  5. outside of Treasurys and perhaps the most defensive stock sectors:

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