Well it had to happen. It seems the Greek tragedy is finally reaching its end game. It’s been a long time coming – about 5-6 years in fact. Given this period, there has been much time to prepare. So to put your mind at ease we thought it best to put pen to paper to lay out our strategy for the Stonehouse Core Value Portfolio (CVP) in what looks to be an unfolding crisis over the course of the coming days/weeks.
For a start, ‘prepared’ is the operative word in the above paragraph. It seems everyone has a ‘Plan B’ for a failure of the present negotiations – except the Greeks themselves. The fact that Greece Central Bank Governor, Yannis Stournaras, only two weeks ago intimated that Greece wasn’t prepared for a GREXIT is quite disconcerting.
It tells us that the end game is likely to be drawn-out and messy – much like the debt negotiations themselves. Sure, there is a chance for a last minute reprieve but the fact that Greece’s banks and the Athens Stock Exchange are presently closed and ATM withdrawal limits are being implemented has understandably led to panic on behalf of Greek depositors (which ironically may exacerbate the current crisis). The political rhetoric is also hardening on both sides suggesting that a last minute compromise is becoming less and less likely.
Where to from here? It would be foolhardy to try to predict. The only constant in this whole affair is that getting a grasp on the myriad of possible outcomes is well-nigh impossible. To be sure, an unorderly GREXIT will upset financial markets for a period of time and there will be plenty of hares running as to who will be next – Spain, Italy, Portugal? But even if Greece isn’t prepared I’m sure the ECB and the other members of the world central banking community are. This implies that there has been plenty of stress testing of various banks’ balance sheets to a Greek debt default and any true contagion should be limited given that necessary checks and balances have already been put in place.
Ergo, to put your mind to rest, the fallout should not be another GFC type of affair – but more alike the 1997 Asian Crisis (i.e. something much more localised rather than global in scale). Our thoughts are that the fallout may not even be as bad as that. It is possible that the markets will look through the initial morass and see this for what it truly is – a necessary outcome to get Greece’s economic house in order and in the long term best for Greece and best for the Euro.
But in the interim some form of mayhem is likely to prevail so how is the CVP set up to cope with all this? For a start we have been holding heightened levels of cash in the lead-up to this crisis. Part of this has to do with our thoughts as to the calendar year profile of performance for equity markets over 2015. We saw 2015 as a likely re-run of 2013 – a strong start, soft in the middle, before a final strong rally toward year end. Subsequently, we took profits early in 2015 as equity markets ran too hard too fast and have been redeploying this cash to ‘average in’ at softer equity prices over recent weeks. Undoubtedly, the ensuing days and weeks to come will likely give us even better entry levels to put these excess cash reserves to work as the fallout begins to unfold in international equity markets.
Secondly, our FX hedging policy has been working to insulate the CVP’s performance from the fallout. The $A traded into the $US0.75 cent range early yesterday morning in light of the news emanating from Greece. The fact that a significant portion of the CVP’s international exposures remained unhedged means that downward currency movements are beneficial for the CVP – thereby mitigating (at least in part) potential losses in other areas.
Finally, our perennial policy of maintaining alternatives holdings purely as ‘insurance policies’ should a crisis manifest also gives us solace in the present circumstances. The more Greece disrupts the global financial system, the more volatility traders like 36 South and Triple 333 stand to perform well. Indeed, if we’re wrong and the crisis turns out to be far worse (and more drawn out) than expected, then even the trend following CTA traders AQR Delta and Cantab look set to make gains – potentially negating losses from equity market exposures in particular. It is precisely for this reason that we have held (and will continue to hold) such positions within the CVP. Indeed, it is worthwhile pointing out that as part of the equity holdings in the Portfolio we have exposures to long/short managers that are well positioned to both protect capital and take advantage of opportunities resulting from this crisis.
Hopefully this helps to ease any concerns that you may have. We are confident that the CVP is prudently positioned for what may unfold. Sure there are bound to be surprises here and there, and we will not be immune to negative markets but any losses should be nowhere near as sizable as what you would incur had you equity market exposures alone. Indeed there is the potential that some holdings within the CVP will in fact make considerable returns out of any ensuing misery on global markets. An undesirable outcome we agree but remember the Chinese word for ‘crisis’ also translates into ‘opportunity’.