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Greece's Troubles are Sensational News But No Reason to Change Course

Volatility has been notably and unusually muted in recent months, so it’s not surprising that the media is excited about the events in Greece. Don’t overreact. It’s better to make decisions based on facts, not sensational news reports. The facts suggest that calmness is warranted.

Greece is on the brink of defaulting on a loan payment to the International Monetary Fund (IMF) tomorrow and markets are a little nervous. We say “a little” because financial markets were reasonably well behaved today. We spent the day studying capital market activity, looking for signs of stress, and didn’t find anything that caused undue concern.

The Canadian S&P/TSX Composite Index and the U.S. Dow Jones Industrial Average (DJIA) were both down more than 300 points today. Three-hundred-point moves would have been considered a lot a decade ago, but from current levels, they only amount to a bit more than 2%. Equity markets are volatile at the best of times.

Fixed income markets outside of Greece have also been relatively well behaved, providing further comfort. Indeed, the Bloomberg European Financial Conditions Index still has a near-neutral reading, suggesting that overall financial conditions in Europe are neither overly accommodating nor stressed. While bond yields on Greek debt have understandably risen dramatically – although not nearly as much as they did during the European debt crisis in late 2011/early 2012 – bond yields in other Southern European countries such as Portugal, Spain and Italy, remain very low and near levels at the start of the year.

Credit markets in stronger European countries, like Germany, and closer to home in North America, are taking the Greek situation in stride and show no alarm.

Frankly, we are more intrigued by what is happening in China, where the Shanghai Shenzhen CSI 300 stock index has fallen more than 20% since June 15^th. The Chinese economy is slowing and there is a risk that growth will accelerate to the downside given the significant amount of financial leverage that was deployed during the boom years. Still, the 20%-plus drop has to be taken in context. Up until the peak on June 8, 2015, the CSI 300 Index had risen more than 150% year-over-year. Despite the correction, the Chinese stock market has been one of the world’s best performing this year.

While we hope that the Chinese economy will continue to decelerate at a measured pace, we have purposely emphasized less cyclical businesses in the Odlum Brown Model Portfolio in case economic conditions in China deteriorate more than expected.

Regardless of what happens in Greece or China, we continue to believe that investors will be well-served by owning high-quality businesses operated by great management. Those who anticipate and/or react to volatility by trying to time their entry and exit from the market inevitably underperform those who accept market volatility and remain invested.