Greek fears ease.

29th May 2012

Ian Copelin, Investment Director, my wealth, comments “Given the constant barrage of news headlines surrounding Europe (with speculation of bank runs in Greece and Spain, a Greek exit from the euro (or ‘Grexit’ as some are calling it), to a full break-up of the Euro), it is very understandable that investors have become very nervous.

While the world focuses on the next round of Greek elections on 17 June, which is effectively being billed as a choice for the Greeks:  do they want to get out of the euro or not, it should be remembered that Greece is not the only show in town.  Jim O’Neill, the chairman of Goldman Sachs Asset Management, recently made some interesting observations:

• Growth in the BRICS countries (Brazil, Russia, India, China and South Africa – the world’s five largest emerging countries) is far more critical for global economic health than the fate of Greece;
• The BRICS account for 45% of the world’s population and a quarter of its economy at $13 trillion;
• China creates an economy equivalent to another Greece every 11 and a half weeks;
• Last year the combined dollar GDP of the four original BRICs (BRICS minus South Africa) increased by $2.1 trillion – the equivalent of creating another Italy in 15 months.

Obviously, Jim O’Neill has taken a very simplistic view:  yes, Greece only accounts for a very small percentage (0.4%) of the global economy, but if it did exit the euro and default, it could result in contagion and recession within Europe.  Global trade and ties would mean that a recession may not be confined solely to the euro area – exporting countries (such as the BRICS) would clearly suffer.

However, recent opinion polls suggest that there will be no Greek exit as the New Democracy party, which supports the EU’s bailout plan, will win sufficient seats to form the next government.  Although markets will worry until the results of the Greek elections are known, I believe that the outlook currently being priced into the markets is unrealistically negative, which makes this a great time to invest in equities.”