A Greek Tragedy and the impact on your investments
Written and accurate as at: Jul 09, 2015 Current Stats & Facts
Financial media will be focussed on Greece for days and weeks to come following a very strong ‘No’ vote in last week’s referendum.
Greece is broke, and has been surviving thanks to financial support from the European Central Bank, the International Monetary Fund and the other European Union members, particularly Germany.
The recently elected Greek Prime Minister, Alex Tsipras, called for a referendum asking his people should they accept the terms of the latest ‘bail out’ offer from the EU, ECB and IMF. In short, they could access the cash they needed to keep the country operating, paying pensions, public servants and essential service providers, but in return the Greek government needed to agree to some harsh restrictions on spending aimed at (eventually) balancing the books.
It is a case of, we are happy to help you in the short term, but you need to take some harsh medicine to fix your problems long term. The Germans do not want to continue paying Greek pensioners so they can retire at 57.
The resounding no vote was a surprise to many commentators and suggests that the Greek population are not happy with the severe austerity being imposed by outsiders. It means that the probability of Greece leaving the European Union and returning to the Drachma is increasing and now looks to be most likely outcome (although still far from certain).
So, what does this mean for us as investors in Australia?
In the short term, there is likely to be volatility in capital markets. We have already seen some swings in share markets as the negotiations broke down last week, and while the drama dominates the headlines, the market swings are likely to continue.
This should not be a concern. We invest in equities and other growth assets for the long term, and always understand that market volatility can impact prices and lead to short term falls in value.
The important question should always be ‘how will this impact the ability of my investment to generate profits?’ In the medium and long term, what drives value and share market returns is the ability of companies to grow profits and pay dividends to shareholders.
For Australian companies, the impact of the Greek referendum, and the potential for Greece to leave the EU will make almost no difference to their earnings or profits. It is an irrelevance. The same can be said for most global corporates.
The reality is that you have very little direct exposure to Greece, and the real impact of turmoil in such a small country is likely to be negligible over time.
So, while we are watching carefully, and with the understanding that we will see some volatility while uncertainty exists, we remain committed to your long term asset allocation as the appropriate way to protect and grow your wealth over time.
