Acropolis Now … a Greek Tragedy … the Grexit — whatever pun you use to describe what’s going on with Greece and Greek stocks, it’s a mess.
But while it’s fun to get all hysterical with the headlines, the sad truth is that most pundits misunderstand precisely what got us here, what’s the way forward and how to profit from the turmoil.
Many are saying this means the end of Greece as a member of the European Union — and perhaps the end of the EU altogether. But the reality is that the current situation in Greece is highly uncertain, and that (obviously) means nobody knows what will happen next. It is not a foregone conclusion, even, that Greece will not restructure its debt despite voting “no” in a referendum to what the Greek people saw as an unpalatable bailout proposal last weekend.
Uncertainty in Greece could be a bad thing, yes, but it could also mean that all this kerfuffle amounts to much less than some investors have been led to believe.
So how can you put your portfolio in a position to profit from this uncertainty if things should turn out to be far less dire than some are predicting?
Greece Stocks Got Here in a Weird Way
Let’s set the record straight on specifics first: For starters, Greece is still part of the European Union and hasn’t parted ways with the euro yet. Contrary to what some have been saying, the referendum was simply on whether or not to approve very specific bailout loan terms.
This is not a refusal of paying any creditors, mind you, just a refusal to one structure of those payments that Greek politicians and voters didn’t like.
Even more confusing is that negotiations didn’t even break down over whether or not Greece needed to make some cuts in spending as part of debt reform — it does need to, and it agreed to some reforms in principle. But reportedly, negotiations broke down not over pension reforms but the pace of pension reforms and not pension reforms themselves.
That, and a rather absurd quibbling over the level of hotel taxes for the tourist-dependent economy.
It’s admittedly crazy that hotel taxes could be the nail in the coffin of Greece as an EU member. However, keep in mind that the decision to walk away from that stage of debt negotiations and call a vote was not the end of the line and will not be the final chapter.
In fact, there could still be a debt deal even now, and a plan to keep Greece in the euro zone.
Of course … it’s also possible that there won’t be a deal. And therein lies the big uncertainty driving the headlines and market volatility.
But even if Greece is removed from the EU at the end of this, things may not be as dire as some pundits claim. Greece is a relatively small economy, and investors both across the European Union and elsewhere in the world have had ample time to prepare for a Greek debt default and the chance of its ouster from the EU.
After all, more than five years ago there were plenty on Wall Street betting against Greece and planning to actually profit from default in 2010. And people have been talking about the PIIGS and contagion in the EU just as long.
So don’t believe everything you see on TV about the death of Europe.
There will be pain for some investors, yes, and assuredly for the Greek people. But it won’t be the end of the world.
What’s the Trade on Greece Stocks and Europe?
If you’re of the mind that most of this is just political posturing and that Greece will ultimately strike a deal with its main creditors including Germany and the International Monetary Fund? Well, now may be your chance to snap up European stocks on the cheap.
The riskiest bet, of course, is playing Greece directly. After all, the Global X FTSE Greece 20 ETF (GREK), the major Greek fund out there, is down more than 25% year-to-date and off more than 10% since early trading on Wednesday. Even though the fund is ostensibly diversified, it is a pure play on the turmoil in Greece and thus subject to severe volatility if things don’t go well.
It’s also worth noting that about 25% of assets are in major banks in the country, including the National Bank of Greece (NBG) which has been cratering on fears of insolvency for the financial sector without backing from the European Central Bank. Banks will see the biggest turmoil — but if you’re a swing trader with a strong feeling Greece will pull through, they could also provide the biggest opportunity.
Personally, I think it’s very risky to dive directly into Greece right here. But I wouldn’t be too fearful of responsible buying across Europe writ large. Even if a Grexit does go down, the chance that all of Europe will fall apart — particularly at this moment, when many nations are on firmer economic footing than they were a few years back — seems very, very slim.
In fact, you may be surprised to learn that the diversified iShares S&P Europe 350 Index ETF (IEV) is actually still in the green about 1% YTD despite recent troubles and a 5% decline in the past month. Same for the Vanguard FTSE Europe ETF (VGK), which is up 1.5% YTD after a similar dip.
That makes both Europe funds outperformers vs. the S&P 500 since January, in case you’re keeping score.
Personally, I think the fears of contagion are way overblown and the coming days will provide a great buying opportunity in Europe for long-term investors.
The Other Side
And if I’m wrong and the EU falls apart?
Well, then the global economy and international investors have a ton of problems beyond just their portfolio. From the complication of re-creating forex markets across Europe to reforming national governments to the inevitable meddling from nearby Russia, things will be ugly indeed.
But I prefer not to live my life or invest my money based on the idea that the worst will happen and that the global will fall into prolonged worldwide recession and political infighting.
Even if you’re right with a prediction like that … what does that get you? An “I told you so!” to the tens of millions of economic refugees?
Doom and gloom haven’t paid off since 2009, and it won’t here. I think it’s mighty aggressive to bottom-fish in Greece, but I do think a responsible investment in large-cap European equity via funds like the VGK or IEV could be a wise move over the coming weeks.
Or, at least, it will be if you’re patient. Because the short term will remain very uncertain.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.