Analysts say 'Grexit' unlikely; oil price slump overdone

Singapore

ANALYSTS, in addressing the twin fears roiling financial markets, are saying that a Greek exit from the eurozone is unlikely and that the oil price correction looks a bit overdone.

But they agree that an uncertain political year is in store for Europe, with elections in Greece, France, the UK, Portugal, Spain and possibly Italy.

Weak global demand will also ensure oil prices stay low, they say (view infographic).

Michala Marcussen, global head of economics at French bank Societe Generale, in an interview with The Business Times on Tuesday, described a Greek debt default and a subsequent exit as a "low probability event", as there was little economic interest for the country to do either.

Fund manager BlackRock's chief investment strategist, Russ Koesterich, listed for BT several reasons for Greece to remain in the eurozone. One is that a recent poll indicated that 70 per cent of Greeks want to remain in the eurozone, he said.

And the lead enjoyed by the opposition Syriza party over the New Democracy party of Prime Minister Antonis Samaras is narrowing ahead of the country's Jan 25 election. Even if Syriza wins - this is the party that wants to renegotiate Greece's bailout and write off a chunk of debt - it might not be able to form a majority government, said Mr Koesterich.

Meanwhile, Mr Samaras, supported by Greece's creditors, has been cast by his opponents as an advocate for unpopular austerity policies.

Lim Say Boon, chief investment officer of DBS Bank's wealth management business, said that even if Greece exited the eurozone, it would not be catastrophic, as its economy was relatively small.

But Societe Generale's Ms Marcussen warned: "Financial markets cannot break up Europe. The politics can. The politics are what you need to worry about."

The latest crisis to hit the eurozone started at the end of last year, when the Greek government failed to get its candidate elected for the presidency, a ceremonial post. This triggered a snap general election. Resurgent fears over a Greek exit from the eurozone have caused European stocks to drop around 4 per cent year-to-date, and the euro to trade at a nine-year low against the US dollar.

Greek 10-year government bond yields have risen to around 10 per cent, though they are still far from the 37 per cent reached during the 2012 crisis. In a flight-to-safety reaction, investors pushed US 10-year government bond yields below 2 per cent.

Ahead of the Greek election on Jan 25, two important dates to watch are Jan 14 and Jan 22, Ms Marcussen said.

On Jan 14, the European Court of Justice will give a preliminary ruling on the legality of the "outright monetary transactions" scheme of the European Central Bank (ECB), under which it buys government bonds of troubled countries. This scheme, though never used, has calmed markets in the last two years.

The other key date, Jan 22, is when the ECB meets and markets will watch to see whether it announces a large-scale "quantitative easing" programme to buy government bonds.

An issue to be clarified is whether the ECB should have seniority over private bondholders, Ms Marcussen said. If it does, private-investor confidence would take a hit, since they will take on higher risks. The risk is that the ECB will be vague about the seniority issue, or will unveil only a small programme that disappoints markets, she said.

The Greek government owes creditors roughly 320 billion euros (S$508.7 billion), much of which is held by official bodies. AXA Investment Managers said in a Dec 30 note that debt coming due this year is 29 billion euros. This comprises debt held by the ECB or eurozone central banks, the International Monetary Fund and short-term treasury bills. Meanwhile, the Greek government will only muster a primary surplus of 2-3 billion euros.

Nevertheless, AXA has a baseline scenario where there is "some fear, not much harm". In this hypothetical situation, talks with international lenders start soon after the elections, and a restructured package and emergency short-term loan are worked out. Meanwhile, a bond-buying programme announced by the ECB will include Greek government bonds and keep funding costs low for the government. The only victim is the Greek economy, the nascent recovery of which will be delayed until end-2015 or 2016, AXA said.

As for oil, analysts say that prices might have fallen too fast. American benchmark West Texas Intermediate crude oil was trading at US$49 a barrel on Tuesday evening, down more than 50 per cent from six months ago.

Energy-related stocks around the world have plunged; Singapore rigbuilder Keppel Corp fell 37 cents to S$8.32 on Tuesday.

BlackRock's Mr Koesterich said that he would be surprised to see oil trading at the US$40s for a barrel over the long term. "I think we're approaching a floor, but in the near term, markets are overshooting."

He said some large integrated oil companies had become quite cheap and represented long-term value.

DBS's Mr Lim said he expected oil to trade back at US$58 a barrel by the end of the year, and argued that the Middle Eastern countries had budget assumptions of over US$80 a barrel, and would be unable to sustain producing at lower prices. "If there's sufficient will to cut two million barrels a day, there'll be a huge bounce. Currently, there's no will."

Overall, analysts remain positive on stocks, saying that while they are not cheap, they are not over-valued. Underpinning the market are how inflation and interest rates remain low, and additional central bank stimulus in Europe, China and Japan is on the way. Stocks in US, Japan, India and China are highlighted.

BlackRock's Mr Koesterich said: "I don't think this is the beginning of a bear market, but evidence of the high-volatility regime. For the most part, the environment is favourable for stocks. Valuations not cheap, but not consistent with previous bull market peaks."

Bruno Taillardat, investment director at fund manager Unigestion, warned of contagion risk in an interview with BT on Monday. The euro debt crisis, which started with Greece in late 2009, soon spread elsewhere; besides Russia, there are currency risks for South Africa, Brazil and Indonesia: "It starts with Russia, (then) people say: 'Do we see risks elsewhere?' You need to make sure a country is well-diversified in its revenues, well-managed, and that its current account is not in deficit."