Investors are a funny bunch.
That’s not a criticism of individual investors, but investors collectively, who often allow fear to drive their decisions rather than rational thinking.
Right now much of the fear experienced by investors is being driven by concerns about a possible ‘Grexit’.
If you’re unfamiliar with the term, Grexit is short for Greek exit, specifically from the eurozone and/or European Union.
The latest on this is that Greek officials have submitted a new reform proposal to their creditors, who are apparently unimpressed. Talks continue.
As a result of this fear, the FTSE 100 index of leading UK company shares fell to a three-month low at close of trading yesterday.
The FTSE 100 fell 36.24 points to 6,753.80, its lowest level since 13th March. This was a broad-based sell-off of stocks, with no particular sector faring especially worse than others.
The impact of Greece leaving the eurozone remains unclear.
Some believe a Grexit could destroy the eurozone. Alexis Tsipras, Greek prime minister, has said that a Grexit would be the beginning of the end for the currency union.
Several European politicians however have argued that a Grexit would be containable, especially as banks across Europe have relatively low exposure to Greek debt.
Possibly the bigger issue following a Grexit would be which nation falls next; Portugal and Spain still look vulnerable.
But what about Brexit, a British exit from the European Union?
Unlike Greece (in so many ways, but especially this one), Britain is not a member of the single currency. Our departure from the European project would have less of an impact as a result.
It’s still early days for the Brexit story. Credit ratings agency Moody’s has already said that an early referendum on the UK’s EU membership could put Britain’s sovereign rating at risk.
They have identified a 2016 referendum as potentially hazardous for the UK, arguing that it reduces the time available for negotiations with the EU on “the reforms and repatriation of powers sought by the UK Government”.
Moody’s have also said the move “would have negative implications for the UK’s growth prospects and – in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU’s single market – would likely put pressure on the UK’s sovereign rating”.
We expect markets to remain jittery in the short-term as Grexit fears are realised, resolved or deferred.
In the medium-term, as the outcome of the UK referendum on EU membership becomes clearer, we could see another bout of investor fear.
Our advice to clients will remain the same; stick to your long-term investment strategy and try your best to ignore the short-term fears which drive volatility into markets. Focus on what matters.
