How Grexit Might Affect the Euro Zone Equities Rally

Fallout from the Greek debt mess is more likely to buffet peripheral, rather than core, European economies.

Institutional Investor

July 1, 2015

By Robert Stowe England

 

The specter of a Grexit from the euro is back. If it comes, euro zone bond and equity markets are not likely to be struck by panic but will instead “ride out the storm,” says Tom Elliott, international investment strategist at financial advisory organization deVere Group in London.

 

“I think the weakness, if any, will be on peripheral European stock markets in Italy, Portugal, Spain, Ireland — the ones that were in trouble before,” Elliott says. “I don’t think we need to worry too much about damaging the German DAX and the French CAC.”

 

Any potential shock to euro zone equities would be muted by the same force that led investors to crowd into such funds in the first place, says Elliott. And that would be the January 22 commitment by European Central Bank president Mario Draghi to a €1 trillion ($1.1 trillion) quantitative easing program. Monthly public and private sector securities purchases of €60 billion will continue at least through the end of September 2016 — or until euro zone inflation moves toward the ECB’s 2 percent target rate.

 

Despite fears of a Greek default and exit hanging over the European Economic and Monetary Union, institutional investors were responsible for net inflows of $10.9 billion into euro zone equity funds over the first quarter of 2015, according to eVestment, a Marietta, Georgia–based financial data firm. That brought total euro zone equity fund assets to $38.7 billion. A single exchange-traded fund, the exporter-heavy WisdomTree Europe Hedged Equity Fund (HEDJ), accounts for $10.6 billion — or nearly all the fund flows into the euro zone in the first quarter, according to eVestment. The ETF’s 18.2 percent return placed it No. 1 among the 96 euro zone equity funds that eVestment tracks. Its three-year 18.55 percent return also places it at the top of its class.

 

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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