OCM Wealth Management CEO, Jason Stather-Lodge, cites two key areas they’re reallocating to
As the Greek banks opened on Monday with little changed in terms of people getting access to their savings, we are getting some form of clarity of what the timetable is for the bailout. Troika officials are working on a new memorandum of understanding, outlining the loan for the next three years. This is expected to conclude by August 6th and the first distribution by August 17th. The approval of the package, worth EU86bn, will need to be reached by the Greek parliament by 7th August, which one assumes is a rubber stamping process.
It seems we are out of the woods for now, but with the German’s insisting that, at best, a limited debt haircut will ensue, some economists are now placing a high probability of a Grexit back on the agenda for next year. In a recent Bloomberg survey, 75% of polled economists felt the issue will arise again in 2016 for the simple reason that EU86bn is but a stop gap. When you think Greece has been basically inactive for the last month or so as this matter has played out, and from 2008 – 2015 their economy has contracted almost 25%, then this can only be seen as a long term structural issue requiring long term solutions. With Quantitative Easing scheduled to end in September 2016, storm clouds are gathering already. For now though, the matter looks to have passed and markets should begin to rally once more.
With this in mind, we see German blue chip companies such as VW and Siemens as sound investments and have started tracking the DAX which is currently at 3 to 4 times earnings. On top of this, the ECB is expected to inject €40bn into the system soon. So a DAX tracker seems sensible particularly as there’s little point in trying to call individual stocks when a huge market event lurks on the horizon.
UK Borrowing and Taxation:
On Tuesday (21st) the Office for National Statistics released data revealing the smallest budget deficit for any June since 2008. Net borrowing for the public sector was £9.4bn versus £10.2bn from the previous year, as revenues for the Government was led by both income and corporation tax, both of which were at record recent highs. The only blot on the landscape was the fall in stamp duty revenue, which backs up latest thinking in that the shortage of house sellers continues. Added to these numbers has been some proceeds from sales of both Royal Mail and Lloyds Bank, with the latter an on-going process.
So, we remain long Sterling (as we have been since the election in May) and have allocated cash to the UK small and mid-cap sectors. The FTSE 100 looks too over-exposed to the potential risks from Greece so we will only look to reallocate once these risks have subsided. The small and mid-cap sectors look better value and are less tied to oil companies currently being squeezed by the price slump. Prices could well bounce back to over $100 a barrel in the next 5 years with significantly higher demand predicted from Europe, USA and Asia (not to mention a contraction in supply from OPEC) but for now we’re avoiding any meaningful exposure to this area.