European equities are set to remain positive on the outlook should an €86 billion bailout never happen, despite expecting near term volatility given the recent strength in markets, according to an expert.
    
The base case remains that a bailout will happen particularly given overnight progress of the Greek parliamentary approval, with the next step being for the parliaments of the creditor countries across Europe to approve the bailout package, said Rajesh Tanna, chief financial adviser, J P Morgan Private Bank.

Greece contributes less than two per cent to European gross domestic product (GDP) and as such will not derail the economic recovery the region is currently enjoying, he said.

Any negative impact from a bankruptcy of Greece wouldn’t affect the European banking sector, given that very little Greek government debt is held outside of public institutions such as the European Central Bank (ECB) and International Monetary Fund (IMF).

The contagion risk would be contained given both the credibly of and also the monetary tool the ECB has at its disposal.

In the event of a ‘Grexit,’ the ECB would be expected to announce a special plan in addition to quantitative easing designed to directly purchase government debt of other Southern European countries, said Tanna.

With the current European equities’ two per cent surge, the expert expects profit growth after a four-year absence helped by euro weakness driving better profits for Europe’s multinational business; falling oil price helping the region as the Eurozone is an oil importer; and quantitative easing driving asset rotation out of fixed income into high dividend yielding and high quality equities.

Meanwhile, the euro fell more than one per cent as the Greek deal renewed focus on the prospect that the US Federal Reserve might hike interest rates in September. With regards to this, FX investors may note that the largest portion of the euro weakness is behind given the very large move from a peak of 1.40 versus the US dollar, said Tanna.

This said, further weakness cannot be ruled out particularly if the US interest rates begin to rise as expected later this year. For US dollar-based investors, who are particularly conscious or worried about this risk, he suggests hedging at least some of their FX exposure when investing into Europe.

The best case scenario for Greece and Europe would be that Greece remains in the Euro and that this most recent crisis is used as a base from which to increase political integration in Europe and also put Greece on a sustainable path to recovery.

The latter would probably require some additional fiscal support for example through infrastructure investment. Greece will also ultimately require some form of debt relief.

Should Greece leave the Euro Zone, Tanna does not see a significant impact on the fundamentals for Europe and its companies, so would thus see any market weakness as a buying opportunity.

For Greece, however, an exit would mean significant economic weakness, more likely a large depression, he said. - TradeArabia News Service