Why Greece matters to US investors
Greece is a bit player in the global markets. But you’ve got a recipe for trouble when you add Greece’s debt mess to the fiscal failings of the nations known collectively as the PIIGS.
Audrey Kaplan, lead manager of the $704 million Federated InterContinental Fund, tries to keep Greece’s small size in mind as she considers the fear that the PIIGS - Portugal, Ireland, Italy, Greece, and Spain - are sowing in global markets.
For starters, Kaplan notes that the combined market value of a dozen commonly traded Greek stocks is less than half that of Citigroup. And Greece’s population of 11 million is less than one-third of California’s.
“Perhaps everyone should relax a little bit,’’ she says.
Still, Greece matters. That’s because the risk of a government default has drawn fresh attention to less-urgent debt troubles elsewhere on the continent - problems which could balloon if investors anxious over Greece’s troubles also flee the other PIIGS countries, raising their borrowing costs.
“The contagion risk is really the issue, rather than Greece itself,’’ says Kaplan, whose 20-year career included a stint in Tokyo as an Asian credit crisis unfolded in 1997.
The PIIGS all share slow economies and big deficits. The fear is that those nations and the 12 other European Union members could see confidence drop in their common currency, the euro.
The EU also could be divided by friction over possible single-country bailouts, hurting Europe’s economic prospects broadly.
A Greek tragedy isn’t yet at hand, but global markets have seen plenty of drama this month. Recent revelations about Greece’s economic mismanagement and even faked statistics helped trigger a 4 percent decline in major US market indexes over a weeklong stretch.
Markets reversed course and erased the loss after European Union leaders responded with a vague pledge to bail Greece out if needed. Meanwhile, the euro sank to nine-month lows.
If it seems remote to US investors who like to go global, it’s not entirely so. About 300 US mutual funds hold more than 5 percent of their portfolios in stocks or bonds from the PIIGS countries, according to a screen by Morningstar Inc.
Kaplan’s large-cap fund has no stakes in Portugal, Ireland, and Greece, and a minuscule amount in Spain. About 10 percent of its holdings are in Italy, where Kaplan sees lesser debt risks than in the other four.
She’s been a manager since 2004 at Federated InterContinental (RIMAX), which ranks among the top 15 percent of its peers based on performance over the past five- and 10-year periods. Kaplan also helps oversee strategy for Federated’s total $2 billion in international stocks.
Here are excerpts from an interview with Kaplan on Greece’s debt troubles and the markets’ reaction:
Q. Where are the biggest risks in Europe?
A. Greece and Portugal. It’s due to government balance sheet mismanagement that has gone on for decades. In the same way that American consumers were spending more than they were saving, the government was doing it in Greece. We’ve known for a long time about chronic tax evasion among the self-employed in Greece and about overstaffing and overcompensation among Greek public-sector employees. Portugal has many of the same problems.
Q. The government deficit in Greece is 12.7 percent of the nation’s annual economic output. That’s not much bigger than the US deficit compared with our own gross domestic product. So why are investors so much more worried about Greece’s fiscal health?
A. We have the dollar, which remains the reserve currency of the world. And for any number of other reasons - including our size and stability over time - markets aren’t as worried now about the US deficit.
Q. Where do you put the chances that Greece might be forced out of the European Union if it doesn’t get a handle on its debt?
A. Less than 5 percent. It took decades to create the EU, and it’s still solid. If Greece were to leave, it would be a bit comparable to California pulling out of the United States because of that state’s current budget problems.
Q. Why did the EU signal it would back Greece’s debt? When the EU was founded, didn’t it adopt a no-bailout policy?
A. The EU nations understand the risks. They can choose to assume the debt commitments of member states to keep the risk from spreading to other countries. Greece’s government ministers want to solve this on their own. But to keep the fear from spreading, they’re saying they would go against the Maastricht Treaty [the 1992 agreement that established the EU] if necessary.
Q. With Greece and the other PIIGs countries, we’re talking about government debt, not corporate debt. Might stocks within those countries be insulated from problems their governments are having?
A. Research shows that’s unlikely. If you put two well-diversified international portfolios together, you can expect to see most of the differences in returns result from how each portfolio allocates its holdings among countries, rather than from selection of stocks within those countries. So country selection is the most important factor.
Q. Your fund can buy stocks around the world. How can you gauge risks within countries broadly, and individual companies?
A. Our fund generally holds 150 to 200 stocks, because we recognize there’s always a risk of default. We’ve now got more than 200, so if one stock tanks, the impact on the portfolio overall will be minimal. We’re obviously screening out all the indicators we can. But if there’s a company intent on misleading investors, then you want to be prepared, and have the proper risk controls in the portfolio.
Q. Which countries offer the best opportunities now for US investors?
A. There are plenty of countries with healthy government finances and good growth prospects. My current favorites include China, South Korea, Norway, Denmark, and Switzerland.
Mark Jewell writes about personal finance for the Associated Press.