Market Insights Greek Debts Updates After Referendum 07/2015 What happened? Greece voted against yielding to further austerity, as demanded by creditors with 61% of voters backing up Prime Minister Alexis Tsipras s rejection of further spending cuts and tax increases. German Chancellor Angela Merkel and French President Francois Hollande called for a summit of euro area leaders to be held on 8 July. The result of the referendum is to be respected, the German government s press office said in an email. The European Central Bank (ECB) is meeting today to discuss extending a new lifeline to Greek lenders, which have been closed for a week under capital controls that were imposed by Tsipras to stem withdrawals. This morning, as of the time of editing, the EUR traded at 1.1036 vs the USD, within the Year-to-date (YTD) (July 6) average of 1.1172. EUR vs USD Exchange Rate Source: Bloomberg, 6 July 2015
What we are watching: 1. Whilst we expect European Union (EU) politicians to restart talks on the Greece crisis, the next date to look out for is 20 July 2015 when EUR 3.5 billion worth of Greek government bonds that are held by the ECB mature. The ability to roll over these debts will be the litmus test for the Greek government. 2. Despite the Greek debt crisis since January 2015, the systematic risk within the euro area seems to be well contained. Composite Indicator of Systemic Stress (CISS): ECB Composite Indicator of Systemic Stress in the euro area*: * The Composite Indicator of Systemic Stress (CISS) comprises 15 mostly market-based financial stress measures equally split into five categories, namely the financial intermediaries sector, money markets, equity markets, bond markets and foreign exchange markets. Relatively more weight is put on situations in which stress prevails in several market segments at the same time which, in turn, captures the idea that systemic risk/stress is high if financial instability is spread widely across the whole financial system. Past performance is no reliable indicator for future results. Sources: ECB, Datastream, AllianzGI Global Economics & Strategy, 3 July 2015. Source: ECB, Thomas Reuters Datastream, AllianzGI Economics and Strategy, 3 July 2015. 3. Moreover, we continue to see both macro and micro improvements across Europe. a. June car sales showed yet more signs of acceleration in key European countries: France +14% (vs YTD + 5.9%); Spain +23.5% (vs YTD + 22%). b. European airline traffic rose 4.9% in May, up from 3.7% prior. Indeed, Amsterdam saw its strongest traffic growth since 2011 in May. c. The latest data shows ongoing improvement in truck traffic. German data, for example, was up 5.5% year-over-year (YOY) in May vs 1.8% YTD. d. Staffing markets (temporary workers) look increasingly healthy: France saw a volume growth of 4.3% in May (vs 1.8% in April); the highest reading since Sep 2011. e. On 1 July, the CEO of Mediaset, Italy s largest commercial broadcaster, commented that advertising sales were up by more than 6% in June, an acceleration vs earlier in the quarter. 2
f. The Italian bank, Intesa s May asset inflows were on par with the YTD average at over 20% annualised. g. Spanish electricity demand is +0.2% yoy in June (once adjusted by temperature and working days), having been down in April and May. h. Prime office rentals in Madrid have started recovering to EUR 25.75/m 2 /month as in 1Q15, according to Jones Lang LaSalle (JLL), from a low of EUR 24.3 at the end of 2013. i. Spain s new passenger car registration is up +23.5% YOY in Jun 2015 vs +14% in May 2015 and +3.2% in Apr 2015. The spill-over monitor (as of 3 July 2015) Peripheral 10-Year Bond Yield Source: Bloomberg, 3 July 2015 Eurozone Sovereign Bond Yield 10-Year Max 14.992 3.971 2.821 2.943 2.351 1.719 1.288 Min 5.517 1.546 1.141 1.125 0.647 0.351 0.074 7/3/2015 14.322 2.925 2.208 2.245 1.582 1.240 0.789 1 year average 8.848 2.762 1.901 2.037 1.445 1.003 0.679 Source: Bloomberg, 3 July 2015 3
(Note: There is no change to Our View from the Greek debts updates published on 30 June) Neither the dividend nor growth strategies have any direct nor indirect revenue exposure to Greece [thus] the impact on their fundamentals is very minimal. Below are the details: Our View: 1. In light of the recent deterioration in negotiations between the Greek government and its creditors, Allianz Global Investors (AllianzGI) assessment of the situation points to a heightened risk for a mistake by either side, which have risen materially and that we have lower confidence in a constructive outcome there. 2. Whilst the markets are speculating on the possible eventual outcomes from the difficult situation in which Greece and the EU find themselves, AllianzGI considers it important to understand the steps that might ultimately lead to a Grexit (Greece exiting the EU) or a Graccident (Greece accidentally existing the EU). 3. Our conclusion is that a Grexit, should it occur, may take over a year and will only succeed through negotiations. This intriguing scenario offers up the prospect of a constructive period of engagement, after the headline shock, between Greece and the EU, which may well offer a buying opportunity for both EUR and EU assets. 4. Timelines and key dates: In the coming weeks, there are a number of key dates at which the Greek debt issue can escalate or be resolved. These dates are the following: 22 June 2015 Emergency summit of euro zone heads of state or government 25-26 June 2015 European Council meeting (heads of state or government of EU member states) 30 June 2015 Greece s EU bailout expires and Greece needs to repay EUR 1.5 billion to IMF 1 July 2015 ECB non-monetary policy meeting; decision on ELA liquidity support 10 July 2015 EUR 2 billion Treasury bill matures 16 July 2015 ECB monetary policy meeting; decision on ELA liquidity support 20 July 2015 EUR 3.5 billion in ECB loans mature Over this period, it is important to note that non-payment of bonds would not be viewed by the credit rating agencies as an immediate default, which thus allows all parties more time to find an acceptable solution. 5. Scenario of a Graccident: A. Whilst much of the external attention and commentary is centred on the loans falling in the coming weeks, the more immediate concern may in fact be the solvency of Greek banks in the face of current uncertainty. Greek banks already received EUR 84 billion of ELA from the ECB, which would be terminated if the banks became insolvent following a run of deposit withdrawals. Clearly, the withdrawals are not in the hands of the EU or Greek government, so a crisis could be precipitated by the actions of Greek individuals themselves. 4
B. Although it is vital to the finances of the Greek banks and the funding of the Greek government, the ELA support is governed by strict legal interpretations by the ECB. The solvency of the Greek banks is also hampered by the aggressive rise in bad debts, as many Greeks seek to defer their repayments in the hope of debt forgiveness or devaluation. C. A clock is already ticking on this crucial issue that will have serious consequences for the Greek economy. D. Ongoing cash withdrawals challenge the Greek banks the ELA will still absorb the shock: Ongoing deposit withdrawals increase the dependency of Greek banks on emergency funding by the ECB Source: AllianzGI Economics & Strategy, Bloomberg, 19 June 2015 6. Scenario of a Grexit: A. It is AllianzGI s understanding of the Maastricht and Lisbon treaties that an exit from the EU or the EUR may be done by negotiation only, as the treaties did not conceive nations ever leaving. It is thus our expectation that these negotiations could last over a year, possibly two. Thus, during this time, Greece would emerge into a kind of purgatory with a range of possible positive and negative outcomes. B. Positive: the Greeks and the EU use this time of stasis to reengage and collaboratively agree a new way forward, which will quickly find favour in other EU peripheral countries and can also be used to show a more positive face to the UK, as the move to a British EU referendum takes place in 2016. This outcome also remains quite likely because the Greeks themselves remain both pro-europe and pro-eu. It is also vital to remember that Greece is part of Nother Atlantic Treaty Organization (NATO), and thus it is in the interests of the United States to encourage a good solution that will lessen any further geopolitical threats from Russia. C. Negative: the Greeks and the EU continue to fail to agree as trust has been fatally broken and tensions rise further both between the other peripheral countries and Greece, as well as with the EU and Germany in particular. This political tension could then flare up in both the Spanish elections later this year and in the French ones in 2017. Greece could well rotate 5
towards Russia, thus endangering the southern flank of NATO at a time of concerns over Ukraine and Syria/ISIL (Islamic State of Iraq and Levant). However, it is equally possible that a Grexit pulls together the rest of the EU and/or euro zone, as further constructive steps are taken towards the United States of Europe. For European dividend strategy: We do not have any direct or indirect revenue exposure to Greek companies as of May 2015 and this development will not trigger any portfolio changes. On the back of the low yield environment and attractive valuations, we think that high yielding European equities should prove relatively resilient to this crisis. The yield pick-up to be achieved in European markets is historically high. Our selection already contains a strong risk assessment on single stock level (dividend sustainability). The Eurozone is currently the region with strongest macro momentum, with data improving across countries and economic sectors. The credit environment is improving, although the recovery of loan growth is starting from low levels in most countries and momentum is still tentative. If our positive outlook plays out, investors should enjoy a solidly positive market return. However, as experienced before, it might be a bumpy road to finally get there. Our focus on companies with high and sustainable dividends should help to buffer some of these politically induced market fluctuations. For European growth strategy: We do not have any direct or indirect revenue exposure to Greek companies as of May 2015 and will not adjust the strategy in view of this event. The focus will still be companies which can rely on structural growth drivers can sell their products independent of the current stage of the economic cycle and are in a good competitive position to still offer opportunities. Such companies often have superior business models or benefit from long-term trends. As a result, they offer a chance of aboveaverage price gains even during difficult periods on the markets. In general, investments in euro-area stocks should benefit from corporate restructuring, low interest rates and the weaker euro exchange rate. The European Central Bank (ECB) is pumping considerable additional liquidity into the market, and credit demand has picked up. The economic recovery scenario is supported by the euro-area PMIs, even though there are differences between the individual countries. Overall, valuations of European stocks still appear attractive in a global comparison. Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance. Investors should read the offering documents for further details, including the risk factors, before investing. This material has not been reviewed by the HK SFC. Issued by Allianz Global Investors Asia Pacific Limited. Allianz Global Investors Asia Pacific Limited (27/F, ICBC Tower, 3 Garden Road, Central, Hong Kong) is the Hong Kong Representative and is regulated by the HK SFC (35/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong). 6