In a hastily called referendum held Sunday, July 5th, the Greek people voted overwhelmingly to reject the latest bailout proposal from European authorities. This “NO” vote surprised most financial market participants, and this morning the Wall Street Journal warned that investors should expect a “rough ride” in Monday trading. While European equities ended the day down around 2% on average, the U.S. equity markets posted only modest declines.
Why such a modest reaction to the now very real possibility of a Greek exit from the Euro currency? Simply put, this is just the latest development in the slow moving train wreck of a country struggling under the weight of more debt than it can possibly repay. In other words, as investors have been watching this drama unfold over the past several years, European authorities have been moving to transfer exposure to Greece from private institutions to the public. In our view, this transfer greatly reduces the “contagion” risk to the rest of Europe arising from a Greek default.
This is a real tragedy for the Greek people (imagine not having the ability to withdraw cash from your bank account), and an exit from the Euro would be messy, but the more important impact on the financial markets is the stabilization of global economic growth. We are seeing signs of the beginning of a bounce in U.S. growth, the weaker Euro is stimulating many European economies, and even Japan’s economy is improving. As a result, we would view any significant market correction arising over the next several weeks as an opportunity to add to equities.
As reminder, we will be holding the quarterly Kanaly Investment Outlook and Strategy webinar on July 16that 10:00 CST. We will discuss Greece and other implications on investment strategy during the webinar.
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