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July 20, 2015

Lessons from the Greek crisis

What lessons should investors learn from the seemingly never-ending Greek disaster? We see two key take-aways:

1. Avoid home bias

Most people are familiar with the benefits of diversification of their investments (don’t put all your eggs in one basket). But in one particular way, most investors seem dramatically underdiversified in this global economy: that is, they have a disproportionate share of their investments in their own country or region. Investors can significantly improve the risk-return profile of their portfolio by going global.

European investors who are mainly exposed to Europe (and the Eurozone in particular) need to realize that they are being locked into a low-growth, politically increasingly unstable area.

The problem in Europe isn’t so much about Greece. It is really about how dysfunctional Europe has become. Greece is just the tip of the iceberg: there has been no progress on any of the major problems Europe is facing, be it Ukraine/Russia, low growth, high unemployment or immigration from failed states in Africa and the war-torn Middle-East.. Greece has exposed the structural flaws of the Eurozone – there is an  endless supply of sticking plasters but no apparent willingness to deal with the fundamental issues.

2. Viability of the Euro remains a big issue for goverment bonds

The long-term viability of the common currency is fraught with doubt. This is a particular problem for Euro denominated government bonds, which are often perceived as safe havens. However, what will happen to those so-called risk-less bonds if the Euro ceases to exists? This introduces massive redenomination risk into the equation (as well as default risk as some countries are likely to want to get rid of their unsustainable debt pile the easy way). Risks are fine as long as investors get compensated for it. With 7-10 year Euro government bonds trading at currently 1.2% p.a. we see the risk-return profile as highly unattractive.

 

Source:
* 17th July 2015:  http://www.ishares.com/de/individual/de/produkte/251738/ishares-euro-government-bond-710yr-ucits-etf

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