The Greek Tragedy Continues: No Government is Likely
In Sunday's Greek elections, conservative New Democracy Party won 29.66% of the vote, while the radical Syriza Party won 26.89%. The incumbent PASOK Party won 12.28% of the vote. U.S. equity futures sold off in early trading and Spanish bond yields broke to euro-area highs. For investors, questions remain about what these results could mean for individual portfolios.
The elections may not change much: Greece has already missed several targets in its bailout plan with the Troika, and has thus far failed to implement all of the required changes. Despite this failure, Germany may not be able to afford Greece's exit from the Eurozone.
Further, the Target II system of balances, meant to balance cross-border flows of currency through the central banks, has left Germany with what can only be described as an exponentially growing liability on all peripheral nations, especially Greece. Bank deposits are being yanked from peripheral nations and being deposited in German banks, among others.
Additionally, Germany may not be able to afford a new currency. Germany's export industry has been the engine of its growth. If Germany were to have to go back to its own currency, many market commentators believe that the new currency would appreciate massively. This appreciation could harm Germany's exports, in much the same way as Japan has seen its exporters squeezed under the recent yen appreciation.
Of course, Greece has its own interest in staying in the euro. Greece has benefited from the largest period of economic growth in modern history since it joined the European Union (EU) and then the European Monetary Union. In the event of an exit, Greece's economy may collapse into a period of accelerating recessions and hyperinflation, a deadly combination that would be extremely painful for a period of at least a few years.
In recent years, the market has been extremely cyclical, with month-long swings driving the market up by over 20% and then down by similar amounts. Investors need to take a medium-term, cyclical view in these markets with respect to these fluctuations. Financials have been very volatile over these swings and technology has seemed to outperform over the longer term. Buying financials when sentiment changes from negative to positive, due to a central bank liquidity operation or larger than expected bailout package, has worked and may continue to work.
Buying technology in these scenarios also has worked. Selling financials when sentiment changes from positive to negative is also a great way for investors with a medium term view to express a negative sentiment on the macro view.
These are turbulent markets, some of the most volatile trading years of the last few decades, and it can be hard to navigate the sea of headline risk. However, investors should have a plan, ignore the intraday volatility due to the headlines, and consider picking strong quality names that have solid cash flows.
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