Picture3-150x150To date this year, the European stock market has performed better than its US counterpart. The ETF tracking the MSCI EMU is up 154% more than the S&P 500 and our holding, HEDJ, the currency hedged European ETF offered by Wisdom Tree is up 495% more returnthan the S&P 500.

 

 

 

The out-performance has occurred in spite of the cloud of a Greek default or possible “Grexit” hanging over the single currency union. A Greek default is certainly a real risk. But, what’s the market telling us? Given this recent performance, is an extremely negative event a high probability?

Here are a few points to consider:

  • Greece’s problems are not new. The Greek bankruptcy has been TV drama for the better part of 5-7 years.
  • It seems to me that any Greek default will continue to be a negotiation and not an event. If there is no credit default event, there is no trigger for derivative products and there will be less disruption to markets.
  • One would hope that creditors have quarantined much of their exposure.
  • Improved global economics and the weak Euro help the situation.

Our macro economic, strategic research partner quantifies their view of the future path of the crisis:

grexit probs

So, the high probability scenario is a “kick the can” approach to addressing and solving Greece’s problems.

Additionally, there doesn’t appear to be any contagion spilling over into other recent problem countries.

spain italy rates

corr spain ital greec

And business sentiment in Europe is improving along with expected earnings for European companies.

earnings and sentiment

Voila, there’s your equation for a depressed equity market to rally.

As always, please feel free to contact me with any questions or concerns.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@4kb.d43.myftpupload.com

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.