Since the end of April, the FTSE 100 has fallen by 570 points. That’s a fall of 8% in a very short space of time and, with June being the worst monthly performance for the index in over three years, it is clear that investor sentiment is on the decline.
Clearly, the reason for the fall is uncertainty regarding the outcome of the Greek debt talks. At the present time, an agreement still appears to be some way off, with both sides playing hardball (in public, at least). And, as a result, it seems likely that the FTSE 100 will drift downwards the longer the situation drags on.
The question for investors is, of course, how low could the FTSE 100 go? Is a fall below 6,000 points really possible and, perhaps most importantly, is this the start of a prolonged period of share price falls following the strong bull market that occurred from March 2009?
On the one hand, the situation in Greece does not appear to be enough to push the FTSE 100 into a prolonged bear market. After all, a Greek default will be very painful for European banks and is likely to cause concern regarding their financial standing. However, on its own a Greek default is unlikely to cause a recession or bear market that is anywhere near as painful as the credit crunch.
Furthermore, the global economy is performing relatively well. For example, the US is on the cusp of interest rate rises and, while China is enduring a soft landing, it is still posting GDP growth of over 7% per year. As such, the wider macroeconomic outlook is arguably the most positive it has been for many years and, while a Greek default would lead to pressure on the global banking system, it seems inevitable that a considerable haircut will be required in order to keep Greece in the Euro. In other words, a lack of full repayment of some degree is already being priced in to stock market valuations.
The problem, though, is what happens after Greece. If it leaves the Euro then it could become a blueprint for other countries that are unhappy with the single currency project to do the same. The electorates of countries such as Spain and Italy could vote in anti-austerity political parties who have the upper hand in negotiations with their creditors, since a further break-up of the Euro would be a situation that existing members would seek to avoid. And, as ever, further uncertainty in the Eurozone would be likely to have a negative impact on consumer confidence, investor sentiment and, ultimately, the FTSE 100.
Looking ahead, a Greek default is likely to further hurt investor sentiment in the short run. And, with the FTSE 100 having shed 8% of its value in around ten weeks, a fall below 6,000 points cannot be ruled out. However, while the situation regarding Greece is a concern, such events have always been a feature of the investment world. In fact, for long term investors they present an opportunity to buy high quality companies at depressed prices.