The Pandora's box breaks open. Greece back in the spotlight

Every summer, there will be an event in the financial world, that will throw the market into chaos. Most of time, news were bad enough to create a market panic that will the stock market into a tailspin. The last 2 years, the ignition point was Greece, so this year, I was expecting a replay of the last 2 years and seems like financial history do repeat themselves all the time. The Greece election held in May created a political deadlock that none of the political parties are able to form a majority government. What's worse is that anti-austerity parties won a significant amount of votes that put them against the pro austerity political parties and this political situation may potentially cause Greece to drop out of the Euro zone. The fear is that if that should happen, this may cause a chain reaction and the first nation to be impacted this time round, will be Spain, Europe's 4th largest economy. This article will examine the probable scenarios and the game plan that I have set in place to minimize the risk and take advantage of the steep correction to make a decent profit for the year. Before that, let's look at other parts of the world and see what other major news are there:

1) Data from US continues to be mixed with more negatives than positives. Major leading indicators shows that the US economy may be stalling again and investors are hoping for additional financial stimulations from the US central bank. The major trading blunder by JP Morgan, which lost 2 billion due to complex credit swaps, may strengthen the hands of the regulators to take a more stringent stand in regulating the banks and preventing another potential "Too Big to Fail" scenario in the future.

2) Oil prices slides to a recent low due to troubles from Europe and a potential slowdown in China. This gave many troubled world economy a slight respite as the fears of inflation comes down, giving central banks more arm power to provide additional stimulations to their economies. All eyes on China to see if they are going to reverse the tight inflation combating policies they have been using in the past few years. As of writing, the Chinese government lowered their interest rates by 25 basis points, a first in many years.

The Still Unfolding Greek Tragedy

I will quote a paragraph from my company news letter which I feel, perfectly sums up the situation in Greece.

Alexis Tsipras of the Greece’s Syrize party

"More than one-third of ministers from Greece’s interim government who ran in May 6 elections did not secure seats in the parliament. 13 out of 29 members of the country’s current government who stood in elections failed to gain enough support to secure a seat in the 300-member Greek Parliament. The two parties that supported Prime Minister Lucas Papademos’s interim government (who are Pro bailout) are two seats short of the 151 seats needed for a majority in the 300-member chamber.

The key issue of all this is that at present, the Greece’s Parliament is divided over whether to renege on the terms of the two bailout agreements negotiated since May 2010. 

Alexis Tsipras of the Greece’s Syrize party said that he aimed to link up with parties in a government that would 1) nationalize banks, 2) place a temporary prohibition on debt payments and 3) cancel the bailout and measures such as labour reforms and pension cuts. If that happens, the chance of Greece leaving the Euro becomes almost certain. The next election will take place on June 17.  "

The date to watch out for is 17 June 2012. This will be the Greece re-election where it will more or less determine if Greece stays in Euro or not and where the direction of this crisis will turn. The portfolio has weathered the May drop pretty well as the defensive nature of the US stock market and Singapore bonds has allowed the portfolio to outperform major stock markets. The Singapore STI index has dropped close to 7% while the portfolio has dropped 3.8% for the month. The main damage to the portfolio is still from the resource fund which is posting double digit drops despite a slight uptick in the earlier part of the month.

The 2 scenarios:

The Greeks decide to press the "Restart Button"

The election results are inconclusive again, with no way to form a government. This will effectively void the bailout agreement as there is no Greek government to carry out the austerity measure stipulated in EU bailout and the next tranche of the bailout funds will not be dispensed. Greek defaults on their debts and they will be removed from Euro. The Euro government and probably many other world governments will take measures immediately to limit the fallout, as the stop gap plans for a Greek exit have probably been formulated since last year as the Greek drama unfolds a second time. The markets will see a sharp drop and bottom out with a period of extreme market volatility as investors seek a better picture how the governments around the world will react. The volatility will probably last the whole year with great potential opportunities at market bottom and that's where our opportunity fund will come in. The probability of this scenario, based on  analysts polls, is lower than that of the second scenario, which, Greece will continue to muddle along. So what's the first thing you should do if Greece defaults? You should immediately book a holiday to Athens as suggested in this tongue in cheek article.

The Greeks decide to stay put

This is a highly probable scenario too. In recent months, the leaders of Europe are punished for their Pro Austerity measures and there is a softening of stance towards strict austerity measures to solve the Euro crisis. The Greeks may be given a sweetener in coming days: To be able to slightly amend the conditions of the bailout package to encourage growth rather than straight austerity measures and this may be able to sway the divided voters  to support the EU bailout plan again. If this should happen, the volatility will be over in matter of months and clam will prevail over the financial markets again... until the same problem crops up some time down the road, maybe next year. The market will shoot up quickly right after the election should this happen and the potential profits will be much lower than the first scenario for our opportunity fund, but at least the portfolio's equity portion are already positioned to ride the fast bounce back.

So in short, it will be another interesting June and if there might be a flurry of fund switches in the near future. Stay tune for more news!

AS usual. Attached are the performance of the fund and the frequently used funds, with the best and worst funds in the Singapore fund universe.