Now that Greek citizens have voted overwhelmingly against further eurozone financial controls, the Greek debt fiasco has entered unknown territory. Dire predictions abound. But Matt Peden, Toronto-based vice-president and portfolio manager at Invesco, and lead manager of the multi-year Fundata FundGrade A+ award-winning Trimark Europlus Fund, is relatively sanguine. Having delivered an average annual compound return of 17.2% for the five-year period ended May 31, 2015 (one of the best in the European equity fund category), he’s been taking profits and is well positioned to acquire any bargains that might arise, whatever may happen.
Trimark Europlus already holding cash
“Our cash position fluctuates with the business cycle,” says Peden, who categorizes his investment approach as GARP (Growth at Reasonable Price). He adds that the fund’s cash levels have been 15%-16% for “at least a year” because of high prices: “It has become hard to find companies at a discount to what they’re worth. There’s been a lack of opportunities, so we’ve allowed the cash to build.”
As for what a “worse-case” scenario might mean now for European business prospects, Peden points out that on a global scale, any direct fallout should be minimal. “Greece is a very small economy – its GDP is less than 1% of U.S. GDP, and under 2% of the Eurozone’s GDP,” he says. “Despite their struggles...it’s going to have limited impact on businesses in Europe.”
Deeper problems with European model
Peden adds that the Greek fiasco exposed greater fundamental problems with the European economic model itself. “The bigger issue with the broader implications is that there’s a flaw is the European system,” he says. “When countries chose to join the European Union (EU), they lost their economic independence, and they lost a lot of buffer room [through currency revaluations].
“When you have very different economies all using the same currency, imbalances arise,” says Peden, pointing to Germany’s economic strength placing upward pressure on the euro, to the detriment of those countries with less productive economies (including Greece) for which a lower euro would be beneficial. “Now you have no mechanism for using different currencies to balance those imbalances.
Threat of “contagion”
“The other, broader issue is that membership in the eurozone will now be seen as not irreversible,” Peden says. “If Greece exits the Union, there are implications for the other countries at the periphery. Portugal, for example, has been under pressure, so if it’s shown that Greece can exit....”
“The real crisis is not around Greece leaving the Union, it’s bigger than that,” Peden says. “It’s about the long-term viability of the eurozone itself, and there are no easy solutions to the flaws. It’s going to require a lot of political will.”
Immediate consequences minimal
In any event, regardless of the inevitable negotiations that will now follow the 60% “No” vote in the Greek referendum, there may be few immediate consequences beyond that country’s own borders. And regarding the repercussions for the European Union itself, that story will take further time to unfold. In the meantime, Peden is prepared.
Prior to the crisis coming to a head, the Trimark Europlus Fund had already divested itself of companies based in Greece as well as Portugal, Spain, and Italy; Peden estimates the fund’s indirect exposure to Greece (companies in the portfolio with revenue coming from Greece) is less than 1%. He’s also eschewed eurozone banks in favor of more stable sectors, such as consumer staples, based in countries with stronger economies. And with cash reserves now up to 16.8% of assets, he’s on the lookout for value propositions.
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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