By Tommy Stubbington
Greece's future in the eurozone is on a knife edge, and so are
investors.
If Greek voters reject austerity demands from the country's
creditors in Sunday's referendum, many investors expect stock
markets in Europe to plummet. A "yes" vote would likely spark a
rally, they say.
But with opinion polls indicating the vote may be close, many
are opting to ride out the storm and stick with their holdings of
European stocks, betting that even an eventual Greek exit from the
eurozone won't derail a broader economic recovery in the
region.
"The problem is it is such a binary event. If you are caught on
the wrong foot you could suffer," said François Savary, who
oversees $11.4 billion as chief strategist at Swiss bank Reyl.
Few expect Sunday's vote to provide any kind of lasting
resolution to Greece's long-running negotiations with creditors.
But most investors agree a "no" vote would mark an intensification
of the crisis--significantly raising the chance of Greece leaving
the eurozone. Monday's market reaction would be ugly, investors
say.
European stocks and bonds of highly indebted countries seen as
vulnerable to shocks from Greece, such as Italy, Spain and
Portugal, have already weakened as the Greek talks deteriorated
over the last month. If markets wake up to a "no" vote on Monday,
the selling could accelerate.
Mr. Savary thinks stocks in Europe would fall by around 5%. If
Greece votes to accept the austerity measures proposed by lenders,
he expects a smaller relief rally.
He remains positive on European equities for the longer term,
and is holding his positions heading into the referendum.
Despite the short-term risks, investors are reluctant to cut
back their exposure to European stock markets, which have surged
this year, fueled by the European Central Bank's stimulus program
and an upturn in the economy.
The Stoxx Europe 600 index remains more than 12% higher in 2015,
having fallen nearly 3% in the last month.
"We are using every setback as a buying opportunity," said
Andreas Koester, head of asset allocation and currency at UBS
Global Asset Management, which oversees $680 billion. Mr. Koester
also expects the market to fall around 5% on a "no" vote, but
expects it to stabilize quickly as bargain hunters step in.
"A lot of people are looking for an opportunity to get into this
market, " he said.
Investors are also counting on the ECB to limit the fallout.
If Greece looks headed for departure from the euro area,
investors will start to worry that Italy or Spain could one day
follow, according to Luca Paolini, chief strategist at Pictet Asset
Management, which has EUR149 billion ($165.3 billion) in assets
under management. But the ECB is likely to counter a heavy selloff
in these countries' bonds, possibly by scaling up its
asset-purchase program, he said.
"The ECB's pledge to do whatever it takes to safeguard the euro
is credible," Mr. Paolini said, adding that Pictet has been buying
Italian and Spanish bonds as prices fell in recent weeks.
The ECB has further tools at its disposal.
Under a program called Outright Monetary Transactions, the ECB
can purchase government bonds of vulnerable countries provided they
first sign up for an aid program. The program hasn't been used, but
Europe's top court recently affirmed its legality, underscoring
that it is available.
Any relief from a "yes" vote could prove short-lived. European
officials have indicated negotiations could still be long and
painful if Greeks vote to accept creditors' measures.
"There will still be a lot of question marks on Monday morning
even if we get a resounding 'yes,'" said Stephanie Flanders, chief
European market strategist at J.P. Morgan Asset Management, which
manages $1.7 trillion of assets.
Write to Tommy Stubbington at tommy.stubbington@wsj.com