Putting the Greece Deal in Context

Now that Greece and its creditors have reached a tentative deal, Russ discusses the two investing themes that are likely to dominate the second half of 2015.

After a number of surprising twists, the recent Greek drama finally took an expected turn Monday, with news that Greece and its creditors struck a tentative deal – $96 billion USD in aid from Eurozone leaders in exchange for tough austerity measure – that would seemingly avoid a Greek exit from the euro currency.

While markets cheered the deal, uncertainty remains. The deal contains several onerous provisions and reforms still need to be approved by the Greek Parliament and then implemented.

But regardless of what happens next, it’s important to put events in Greece in context: Despite all the recent drama and late-night summits between Greece and its creditors, the global economy and markets aren’t too far off the trajectory they were on in early 2015.

However, the turmoil overseas hasn’t changed the underlying fundamentals that have shaped markets for some time now: slow but steady growth, low interest rates, low inflation, a strong dollar and a Federal Reserve (Fed) that is likely to start raising rates by year’s end.

Meanwhile, volatility is still trending upward, U.S. stocks are trading flat to slightly higher, cheaper equity markets outside the U.S. are doing well, bond prices remain modestly lower and commodities continue to struggle. Indeed, it’s worth noting that even when a Greek exit looked most certain last week, bond markets in Italy, Spain and Portugal suffered only modest losses.

In this environment, there are a couple of themes that are likely to dominate the second half of the year.

A focus on the Fed. Attention is likely to turn back to the U.S., specifically the Fed. While the central bank is taking note of recent events in Europe and China, comments from Chairman Janet Yellen last week confirmed that the committee’s bias is to begin raising rates this year. This is consistent with BlackRock’s view and confirms our caution on short-term rates, a risk that was on display last week as two-year Treasury yields surged between Wednesday and Friday, ending the week at 0.65%.

Outperformance abroad. At BlackRock, we continue to believe that international markets (notably Japan and Europe) look poised for outperformance. Although we see U.S. stocks outperforming bonds, as we’ve seen year-to-date, the combination of relatively expensive valuations, a strong dollar and a Fed readying to lift rates is keeping a lid on U.S. stock market gains.

On the other hand, equities in Europe and Japan likely can move higher. Even in the event of a “Greek exit,” the European Central Bank (ECB) possesses the necessary tool kit to manage any contagion to other European countries. And despite last week’s stumble in response to the bear market in China, Japanese equity markets maintain good momentum and reasonable valuations. In other words, despite the ongoing drama overseas, I would still look internationally for the most compelling investment opportunities.

Source: BlackRock Inc.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.


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