Uncertainty.

11th May 2012

Ian Copelin, Investment Director, my wealth comments “Global equity markets can cope with bad news, but it hates uncertainty.

The Greek election result was the worst possible scenario for uncertainty, which in turn creates uncertainty for the Eurozone.

The two main parties, which would form a coalition and continue down the path of austerity and enacting the agreements with its creditors, fell short of a majority in the 300-seat parliament, as voters switched to anti-austerity parties.

Of the two incumbent parties, New Democracy won 19% of the total vote and 108 seats, while the socialist party, PASOK, was in third with 13% and 41 seats – just 2 seats short of a majority. The SYRIZA party, which wants to cancel the bailout terms, came in second with 17% and 52 seats.

Consequently, the New Democracy party had three days to form a coalition.  As it failed SYRIZA has three days to form a government.  After that, PASOK gets three days to try and form a government.  If this fails and the President is unable to broker a government of national unity by 17 May another election will be called.

If one of the other 5 parties that won seats in parliament refuses makes a U-turn and form a government with New Democracy & PASOK, I believe that most likely outcome is fresh elections which will see voter support return to the two main parties, New Democracy & PASOK, which will allow them to form a coalition.

With uncertainty heightened and focus back on European debt, the Spanish market was also hit – the cost of insuring Spanish debt rose sharply over the week.  However, what the market has yet to recognise is that the Spanish government has made it easier for companies to cut wages and renegotiate contracts.  Consequently, their competitiveness has been boosted in a similar way that a currency devaluation would have been used before joining the euro.  As a result, productivity has improved and exports are growing rapidly.

After sharp falls over the last week, global equity markets recorded gains yesterday, helped by strong US economic data – this time it was jobless claims data which was better than expected – and news that the European Financial Stability Facility would make a €5.2 billion payment to Greece. The Dow Jones rose 19.98 points and the S&P 500 rose 3.41 points, while in the UK, the FTSE-100 rose 13.9 points.”