| We are getting very close to a potentially defining moment in the European crisis. The catalyst of course will be whether or not Greece stays in the common currency, a decision that might be triggered by the Europeans or the Greeks themselves.
Unfortunately for investors, that outcome is extremely difficult to predict. It is a political decision, and I would argue that even the politicians themselves don’t know what the outcome will be. Therefore the most sensible approach to structuring a portfolio in our view, would be to prepare a portfolio for the different outcomes that could potentially materialise. Your competitive advantage will be to be the first mover to alter your asset allocation. Essentially we see three axes in the current situation: First of all, (A) the path that we followed ever since the crisis began, a path whereby authorities have essentially postponed a comprehensive solution to this crisis. By comprehensive solution we see essentially two potential decisions. (B) Either a complete restructuring of the Euro with some sort of break up, with just a few countries leaving, a north vs. south division, or Germany returning to the Deustchemark, and alternatively (C) if Europeans wish to hold the Euro together, some significant advance in the fiscal integration process. We are actually navigating betwen these two (B and C) potential outcomes, and the price of assets in the market reflects these potential probabilities. As long as we continue along the path of postponing definitive solutions to the crisis, the natural movement of capital flow in the Eurozone is away from the periphery, towards Germany. Therefore you would want to be structurally short or very little exposed to southern periphery assets and overweight in core European assets such as the Bund and the DAX for equities. If we move towards a fiscal union, Bunds are a sell right away and periphery government bonds are a buy, so you would want to move very quickly. Conversely, if we move toward breakup of the Euro, there the decision tree becomes more complicated as it will become a function of the policy responses to the inevitable contagion that will follow a Greek exit from the common currency. So in summary, you cannot forecast what politicians will decide, but you can prepare yourself to make the right decision the morning the decision is made, and that will be your first mover competitive advantage in the way you handle the portfolio. |
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