Markets hang in, despite Greek woes

The global financial markets dodged another bullet last week when the floundering Greek economy once again managed to avoid the kind of implosion that some observers said is inevitable.

The latest round of austerity measures, coupled with more bailout funds from the European Union, is being politely described as “ring fencing” Greece's financial problems.

More-candid analysts are describing the latest efforts as “kicking the can down the road.”

Anyway you slice it, the result is a near-term sigh of relief that has given market watchers enough reason to refocus on how to invest through and around the continuing Greek tragedy.

“The best way to invest through this is to look at companies that have decent earnings growth despite the woes in Europe,” said Peter Tuz, president of Chase Investment Counsel Corp., a $700 million asset management firm.

“The early part of the year, the U.S. stock market was doing extremely well, then Greece popped up again and the market started getting shaky,” he said. “But the U.S. by itself is still grinding out a recovery.”

Mr. Tuz is waiting for the first quarter's corporate earnings reports to get a better handle on where the U.S. economy is headed, but he is preparing for signs of a slowdown.

The fourth quarter of last year saw 60% of the companies in the S&P 500 meeting or exceeding analysts' expectations, down from 66% in the third quarter.

LACK OF CORRELATION

“That's an indicator that things might be getting a little tougher,” Mr. Tuz said. “We're still going in the right direction, but not convincingly.”

Sluggish economic growth notwithstanding, the S&P 500 has gained 8.2% since the start of the year, which is evidence of a breakdown in correlation between Europe and the United States.

“Since 2009, the situation in Europe has gotten worse, while the U.S. has gotten better,” said Robert Tipp, chief investment strategist of fixed income at Prudential Financial Inc., which manages $270 billion in fixed-income assets.

“There's still a question of whether Europe can ring-fence Greece, and right now, the chances look good,” he said. “But the growth picture for Europe remains soft, while the outlook for the U.S. is one of modest growth.”

Mr. Tipp acknowledges that disaster likely would follow should Greece default on its mountainous debt load. A positive indicator for its future, however, is a good investing environment “be-cause investors are still largely underinvested.”

One reason that market watchers and analysts are feeling better about putting Greece's troubles on the back burner is that the country appears capable of meeting an $11 billion debt obligation next month.

Beyond that, it is anyone's guess.

“The short-term outlook seems to be improving because we've gotten Greece back off the ledge,” said John De Clue, chief international strategist in private-client reserve with U.S. Bank Wealth Management, a division of U.S. Bancorp.

BELT-TIGHTENING

Of course, getting Greece off the ledge meant more help from the European Central Bank, plus enough belt-tightening by the Greek government to send the country's citizens to the streets in fits of rage.

“The fix has been in for a long time with that Ponzi scheme they've been running in Greece,” Mr. De Clue said. “Right now, behind the scenes, the European banks are scrambling to repair their balance sheets, while also contingency planning in the event Greece decides to exit the European Monetary Union.”

A Greek exit from the euro currency would represent the ultimate dropping of the other shoe because it would mean a debt default and move the country back to an extremely devalued drachma currency, leading to hyperinflation.

“The pain the Greeks are feeling now is nothing compared to what they would feel if Greece left the euro,” Mr. De Clue said. “The other countries in Europe will do almost anything to prevent Greece from exiting.”

But even as there are forces keeping Greece afloat and relatively stable to prevent the kind of calamity that likely would ripple across the globe in the event of a default, there is also a case for just ripping off the proverbial bandage.

“Everybody knows the Greeks are not going to pay their bills, and anyone who is holding Greek debt has already written it down,” said Scott Colyer, chief executive and chief investment officer at Advisors Asset Management Inc., a $7.2 billion advisory firm.

Citing the “traveling defaults” in Latin America in the 1980s and the Russian default in the late 1990s, Mr. Colyer said, “I think Europe should be bought, not sold, because what generally follows calamity is prosperity, not more calamity.”

UNDERVALUED ASSETS

“I'm not a Europe bull, but there are some very undervalued assets, financials among them,” he said.

“Europe is almost like California in that it is full of a whole bunch of rich companies and rich people. They will have to move some things around, but they're too rich to go broke,” Mr. Colyer said.

Greece's efforts to buy time over the past few months is nothing less than a “high-stakes game of chicken,” according to Adrian Day, president of an eponymous asset management firm that manages $190 million.

Even though he sees a likelihood that Greece ultimately will default on its debt, Mr. Day thinks that some of the European markets have become too attractive to ignore.

German stocks, for example, are trading at a price-earnings ratio of 11 and are paying a 3.7% dividend yield.

France is trading at a P/E of 9.5 and paying a 4.6% dividend yield.

The S&P 500, by comparison, is trading at a P/E of 14 and paying a 2% dividend yield.

“I would not be looking at any Greek stocks, but I think investors should look to buy Europe on any kind of pullback,” Mr. Day said.

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