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Global Investment Strategy

May 4, 2015 (Weekly Update)

Paul Christopher, CFA®, Head of International Strategy and Co-Head of Real Asset Strategy

Weekly market insights from the Global Investment Strategy team

  • Stress is rising once again over Greece’s financial condition. Negotiations with Eurozone partners could soon come to a critical point.
  • While market action over the past two months signals less concern about Greece than in the past, risks remain for Greece, Europe, and global markets.

What it may mean for investors

  • We still believe that Greece and its creditors will conclude a deal—and recommend that investors maintain their long-term allocations to developed-market assets as part of a diversified portfolio of global equities, fixed income, and other assets.

Does Greece Still Pose a Risk to Global Financial Markets?

Since February, Greece and its institutional creditors (now known as the Brussels Group) have sparred over new loan disbursements to Athens. The Brussels Group has withheld some loan disbursements to prod Greece into conceding to more credible reforms, while Athens has countered that the withheld loan disbursements are pushing the country to the brink of bankruptcy and a possible exit from the Eurozone. In May and June, both sides will have the chance to make crucial decisions about whether the Eurozone will remain intact—with Greece as a member country.

We continue to see compelling reasons for both Greece and its Eurozone partners to maintain the unity of the Eurozone. Greece would probably suffer greatly by going its own way. A bankrupt Greece would struggle to afford imported necessities, and inflation likely would soar if international lenders turned away. In addition, a Greek secession from the Eurozone might inflame other divisions in Europe. For example, the economic hardship across the continent—and the austerity that Eurozone leaders have imposed on their distressed neighbors—could encourage nationalism and distrust of unifying institutions, such as the Eurozone. Already, waves of African and Asian immigrants have increased nationalistic sentiment. Euro skepticism is a strong theme in Greece’s new government and is challenging the traditional parties in Spain ahead of national elections there later this year. Meanwhile, the national election campaign season in Great Britain has sparked debate about leaving the European Union. Once the Eurozone is breakable, the risk is always that another country may break away.

Investors should not be complacent and assume that a Greek exit is necessarily benign for Greece's Eurozone partners. The European Central Bank’s large-scale bond-buying program has reassured investors so far this year. However, the banking sector is a second potential spillover channel into the rest of the Eurozone. For example, if Greece exits and Spain later falls into renewed financial strain—Spanish depositors may withdraw their money, creating stress similar to that in Greece today. Thus, fears of an exit could become self-fulfilling, derail Europe’s economic recovery and spark selling of the euro, Eurozone financial assets, and global equities generally. We believe that this scenario is a low probability one. Nevertheless, investors should not assume that a Greek exit would have only a favorable outcome.

What Should Investors Watch?

Investors may want to track some key May and June events that still may influence the outcome. Greece owes the International Monetary Fund loan repayments on May 6 and May 12 and again in June. Failing on these payments may not force Greece out of the Eurozone, but would likely serve as a warning that negotiations may be failing. However, the Brussels Group may help on May 11 by releasing €7.2 billion (approximately $8 billion) in withheld loan disbursements, which would remove most of the immediate pressure on Greece to default.

Political developments in Greece also may influence the outcome. The Greek government is an unwieldy coalition that includes some members who reject further concessions to the Brussels Group. Greek prime minister, Alexis Tsipras, has suggested a referendum to approve any deal. We see this as a positive development, as we believe the Greek citizens oppose a Eurozone exit. The prime minister also has shuffled his negotiating team and taken a more active role to smooth the negotiations. By contrast, a government split that fails to pass a negotiated deal could bring chaos, default, and, in the worst-case scenario, an exit.

Investment Recommendations

We still believe that Greece and its creditors will conclude a deal, but investors should be aware of the potential downside risks. If we are correct that the two sides will reach a May deal to release withheld funds—and if a broader deal on a new bailout package emerges in June—then Europe's economic recovery and earnings should continue to improve. If Greece defaults and exits the Eurozone, the interruption to the economic and equity market recovery could be temporary—or longer lasting. The worst-case outcome is unlikely but holds significant downside risk for global equities, bonds, and the euro. At this point in time, we suggest that investors continue to overweight developed-market equities as part of a broadly diversified portfolio of global equities, bonds, and other assets.

Paul ChristopherAbout Paul Christopher

Paul Christopher is the head of international strategy and the co-head of real asset strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Christopher focuses on the international economic outlook and offers investment advice on currencies and commodities. He is frequently quoted in the national media, including The Wall Street Journal, The New York Times, Forbes, Time, Investor's Business Daily, USA Today, Bloomberg News, ABC News, NBC News, and CNBC.

Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia. He has consulted with the governments of Hong Kong, Egypt, Russia, Kazakhstan, and the Kyrgyz Republic on monetary policy issues.

*As of Sept. 30, 2014

Risk Factors

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.


Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

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