As the euro crisis sends the stock market tumbling, investment experts remain surprisingly upbeat about equities.
The chances of Greece exiting the euro intensified last week – so much so that EU leaders were warned to have contingency measures in place.
Such was the demand for safe-haven assets that investors rushed to snap up German bonds that paid a coupon of 0pc. That’s right, investors piled in to buy government bonds that will not deliver a return but are deemed among the eurozone’s safest assets.
Morgan Stanley, the investment bank, published a note on Friday to warn: “We think that the ramifications of a Greek exit are more serious than the market anticipates. While a euro zone break-up is not our base-case scenario, we raise our subjective probability to 35pc from 25pc, and reduce the timescale of this move to 12-18 months from five years.
“We believe that the most likely scenario for a divorce is a Greek exit preceded and followed by strong contagion. There are three main channels for contagion: the sovereign, the banking sector and the political situation. The countries most at risk of material contagion seem to be Italy, Spain, Ireland and Portugal.”
Brian Dennehy, a financial adviser, has already prepared his clients’ portfolios for the FTSE100 plunging to 4,000 by the end of the year. “Our clients have largely been de-risked for many months,” he said. “In practice, this means none tend to have more than 20pc in equities. Although there could be some good news if the FTSE hits these levels, if investors are unprepared the risk is that they panic into selling at precisely the wrong time.”
It has been a tortuous few days – headlines of Armageddon and the death of equities will have caused anxiety among investors. They will be asking themselves whether they should be preparing their portfolios for an exit too. Read the rest of this entry →