You must be ready to embrace more risk if a deal between Greece and its creditors — which may be imminent — is actually reached within the end of the week.
Such a strategy comes with caveats: do not ignore fundamentals and trading metrics.
Equity Research & Bonds
My attention was caught this morning by research published by Exane BNP Paribas (entitled “10 minutes at 10am: Greece special”), which argued in favour of banks and construction companies in the Eurozone — they “provide domestic reflation exposure at reasonable valuations“, the broker said.
Given their defensive characteristics, the retail and telecom sectors “provide direct, and indirect, exposure to better domestic consumption“, the broker added. Other financial institutions had similar recommendations for equity investors.
Meanwhile, bond markets sent mixed signals around midday, but falling bond yields in Europe’s periphery continued to fall at a faster pace later this afternoon, suggesting that investors seem to believe that a deal could be a just a round the corner.
How about the UK, then?
The FTSE 100 shrugged off political concerns, and was up 1.43% at around 3.28pm BST.
My Take
During the day, several other headlines pointed to a less clear picture, with senior sources at the International Monetary Fund telling me the deal may not be “a done deal after all, but the parties will find a way around it“.
It’s hectic out there: urgency is being felt in the equity and bond markets around the globe. A few brokers have even arranged conference calls with members of the Greek parliament to explain the thinking behind the negotiations.
If you asked me, there’d be no doubt that some kind of agreement would be reached as soon as this week — my worst-case scenario is based on a soft default of Greece, which would not be forced to abandon the Eurozone, though.
And even if it does, such an outcome may hurt the FTSE 100 over the short term, but I doubt the consequences will be meaningful over the long term.
My Top Picks
In the UK, I am extremely upbeat about the prospects of such consumer companies such as British American Tobacco, Unilever and Reckitt, all of which are poised to rise based on their relative valuations and strong fundamentals.
Smaller companies in the field, whose fundamentals are weaker, may also benefit from a Greek deal, while I am convinced you’d fetch increasingly lower returns by investing in homebuilders under any scenario.
Their shares have rallied hard in recent weeks, and their valuations are demanding, to say at least — Berkeley (+35% since 1 May) is a good example of a stock I’d avoid. The same applies to Balfour Beatty, a construction and professional services group that has been a takeover target for some time.
In this context, infrastructure funds may target utilities if Greek fears subside (rumours of a takeover emerged once again on Severn Trent in the last 24 hours), but consider that the sector has been a laggard in recent weeks, and it doesn’t look like any stock is a truly compelling buy at present.
Regulatory concerns, funding issues and uncertainty surrounding the outlook for interest rates weigh on their valuations — Greece won’t change that.
In the telecom space, BT remains a decent buy based on EE-related synergy potential and yield, but I’d avoid Vodafone. Banks are not my favourite equity investment for the next five to 10 years, but I may consider Lloyds in 2016 — and even Barclays, perhaps — if the bank continues to deliver on a quarterly basis. HSBC promises more upside, too. Either Greece stays or goes, I suggest you keep an eye on these names.
Elsewhere, in the resources space, I’d rather place an opportunistic bet on smaller companies (LGO Energy, for instance), although I reiterate the view that BP and Shell are solid long-term buys based, respectively, on their earnings cycle and upside from the integration of BG. I do not fancy the mining sector, but a Greek deal could boost short-term returns.
Finally, as far as food retailers are concerned, Tesco remains the most appealing restructuring play in the sector, I’d argue, while in the apparel retail world, Ted Baker remains my favourite pick.