Answers on Greece and the current economic cycle

Author -  Keith Poore

Keith Poore, Head of Investment Strategy at AMP Capital, answers your questions on Greece and the economy.

1. What impact will the situation in Greece have on my portfolio?

Greece represents about 0.25 per cent of world Gross Domestic Product*, which is roughly the same as New Zealand’s share, so it should not have much impact on the global economy and markets by itself. 

However, growth and confidence in Europe is still quite fragile so there is a risk that positive momentum would be lost if Greece exited the Eurozone. However, Greece has just secured a third bailout and the election over the weekend of September 19 – 20 appears to have cemented the incumbent party’s position, so we expect less volatility from this front for the next year or two.

Given the bailouts and the election, there have still not been any debt write downs. 

Certainly there are easier terms, like longer to pay back and better interest rates, but the write down of debt will have to be revisited again. By that time however, we can expect the Eurozone economy to be in better shape (post healing from the 2007/8 financial crisis) and European politicians may be willing to be more accommodating.

* GDP is the total value of goods produced and services provided in a country during one year.

2. Are we at the end of this cycle and what steps are you taking to have a soft landing? Are the markets fully valued?

We don’t think we are at the end of the economic or market cycle, and could perhaps describe this cycle as slow burning – the global economy is still recovering from the 2007/8 financial crisis, which makes this cycle much shallower and longer than typical ones. 

Spicers forecast global growth to pick up over the next two years and we expect shares to outperform bonds over this period as relative valuations support the former.

Furthermore, our portfolios have exposure to assets that have performed below expectations over the last few years, so in this respect there is ‘dry powder’ with regards to return potential going forward. These assets include Australian equities, emerging market equities and commodities.

Although it is true that economic cycles last about seven years and we’re about seven years through the current cycle, this has not been a typical economic cycle. The collapse of output and job markets in the United States and Europe was unprecedented in decades and created a lot of economic slack in industry and the job market.

Most economies around the world haven’t taken up the slack yet. 

Once that happens and we start to see prices rising and wages increasing, then central banks will have to respond with interest rate rises (the United States may move sooner than most because their job market is in better shape but we don’t envisage that they will be tightening policy aggressively). Once other central banks begin to move, that will most likely see the end of this cycle but we don’t anticipate that happening for another two or three years.

Answers on Greece and the current economic cycle

Keith Poore, Head of Investment Strategy at AMP Capital, answers your questions on Greece and the economy. Keith Poore, Head of Investment Strategy at AMP Capital, answers your questions on Greece and the economy.

1. What impact will the situation in Greece have on my portfolio?

Greece represents about 0.25 per cent of world Gross Domestic Product*, which is roughly the same as New Zealand’s share, so it should not have much impact on the global economy and markets by itself. 

However, growth and confidence in Europe is still quite fragile so there is a risk that positive momentum would be lost if Greece exited the Eurozone. However, Greece has just secured a third bailout and the election over the weekend of September 19 – 20 appears to have cemented the incumbent party’s position, so we expect less volatility from this front for the next year or two.

Given the bailouts and the election, there have still not been any debt write downs. 

Certainly there are easier terms, like longer to pay back and better interest rates, but the write down of debt will have to be revisited again. By that time however, we can expect the Eurozone economy to be in better shape (post healing from the 2007/8 financial crisis) and European politicians may be willing to be more accommodating.

* GDP is the total value of goods produced and services provided in a country during one year.

2. Are we at the end of this cycle and what steps are you taking to have a soft landing? Are the markets fully valued?

We don’t think we are at the end of the economic or market cycle, and could perhaps describe this cycle as slow burning – the global economy is still recovering from the 2007/8 financial crisis, which makes this cycle much shallower and longer than typical ones. 

Spicers forecast global growth to pick up over the next two years and we expect shares to outperform bonds over this period as relative valuations support the former.

Furthermore, our portfolios have exposure to assets that have performed below expectations over the last few years, so in this respect there is ‘dry powder’ with regards to return potential going forward. These assets include Australian equities, emerging market equities and commodities.

Although it is true that economic cycles last about seven years and we’re about seven years through the current cycle, this has not been a typical economic cycle. The collapse of output and job markets in the United States and Europe was unprecedented in decades and created a lot of economic slack in industry and the job market.

Most economies around the world haven’t taken up the slack yet. 

Once that happens and we start to see prices rising and wages increasing, then central banks will have to respond with interest rate rises (the United States may move sooner than most because their job market is in better shape but we don’t envisage that they will be tightening policy aggressively). Once other central banks begin to move, that will most likely see the end of this cycle but we don’t anticipate that happening for another two or three years.
Answers on Greece and the current economic cycle
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