Tuesday, 30 June 2015

In addition to our regular monthly meeting cycle with the Investment Committee, from time to time we update them in between meetings. With the events in Europe over the last few days we have provided such an update. We thought this blog would be a good opportunity to share the main points with members too.

In summary,

  • Greece is dependent on loans from other Euro zone countries, and these come with conditions that have produced recessionary conditions in Greece for the past five years.
  • The Greek Prime Minister has unsuccessfully tried to negotiate softer terms.
  • Greece will hold a referendum on Sunday 5 July on whether it should accept the latest proposal. The situation remains very fluid and there are many headlines and many unknowns although broad fundamentals remain relatively unchanged.
  • The uncertainty has produced a sell–off in share markets which creates a drag for our Ready Made options, where shares comprise the largest exposure. However, these portfolios are now much better positioned than they were several years ago.
  • We don’t try to anticipate what politicians and markets will do in situations such as these, rather we consider long-term valuations and buy (for example) if prices become attractive compared to these fundamentals.

What is happening in Greece?

Unable to borrow from the private sector, Greece has been receiving loans from other Euro zone countries and the International Monetary Fund (IMF) since 2010. The loans are provided as long as Greece meets certain conditions that are intended to improve the Government’s budget balance. The terms have placed Greece in recession for much of the past five years.

A new government was elected early in 2015 promising to negotiate softer conditions, only repay part of the debt (e.g. 75 cents of every dollar lent to them) and keep the Euro as its currency. In response, lenders suspended further loans. The Greek Government has found it difficult to make basic payments. For example, prescription drugs are difficult to come by since they are subsidised by the Government and suppliers are concerned bills will not be paid. Greece may also default on loan repayments to the IMF and European Central Bank due in coming months.

Greece has been negotiating a new package of loans with other European countries for months. Sticking points include:

  • Debt relief – Greece wants a commitment it does not have to repay the entire loan.
  • A credible plan to deliver a budget surplus. Hypothetically, the lenders believe that if all Greek debt were written off Government policies should produce a budget surplus. Lenders don’t believe the current plans of the Greek Government can deliver such a surplus.

Events have recently taken a turn for the worse. The Greek Prime Minister has called a referendum on whether to accept the conditions of a new loan program proposed by the IMF and Euro zone countries. There is speculation that rejecting these terms could see Greece exit the Euro zone. Consequently, cash withdrawals from Greek banks intensified in recent times. Citizens fear their savings could be converted from Euros to a new, but much weaker, Greek currency. Many ATMs in Greece have run out of bank notes, a cap has been placed on daily withdrawals and Greek banks will be closed until after the referendum.

What Greek exposures does QSuper have?

In QSuper’s Ready Made options, namely Balanced, Moderate, Aggressive, QSuper Lifetime and International Shares we have chosen not to invest in Greek shares or bonds. For these options, Greek exposures were removed several years ago. The size of these investments was always small but QSuper was concerned with the administrative headache and management distraction an exit from the Euro zone could create.

You should note though that some Self Invest exchange traded funds (ETFs) could hold a small investment in Greek shares.

How is QSuper responding?

While there is no direct exposure to Greece in the Ready Made options, there will be an indirect impact on QSuper’s investments. As of this morning, Australian and international share markets have fallen a couple of percentage points on average and high quality government bonds have produced strong returns (in the order of a percent or two) as investors have moved to more defensive asset classes.

The changes we have made to these portfolios over the last few years mean they are more robust to events such as these. We have less share exposure (that went down) than we used to and more bonds (that went up). Shares are still the largest risk asset in these portfolios so that an event such as this, that is bad for share performance, will still detract from the performance of these options. Any losses however are likely to be less than we would have seen had the portfolio changes not been implemented.

Our approach is not to try to anticipate what politicians and markets will do in situations such as these. Rather, it is to consider prices in terms of long-term valuations and to buy (for example) if prices become attractive compared to these fundamentals. In fact investment opportunities may arise as a result of these events and we will evaluate these as they arise as part of our usual process. Of course, we remain alert to the news flow, and the potential consequences of this, and will be cautious about increasing risk if a particularly negative event has transpired that we do not believe has been fully priced. But, in summary, it is business as usual for us, noting that markets are moving more quickly than normal.

The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.

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