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Now is not the time to bury your head in the sand. Things are unravelling in the eurozone. And the more I look into this crisis, the worse I feel about the markets.
There is now a real and sudden possibility that Greece will exit the euro. And if Greece goes, others could well follow. Ireland, Portugal and Spain – all labouring under the weight of unsustainable debts - will waste no time following the Greeks out the door.
That could be devastating for these markets. British banks will certainly be cowering at the prospect.
But it won’t all be bad news. In fact, today I’d like to expain why a Greek exit would be a good thing. I see opportunity here – the prospect of massive gains for patient investors.
And I want us to put a game plan in place.
Default is the best option
Towards the end of March I said that I wouldn’t touch Portuguese stocks. Sure they were cheap, but I reasoned they’d get cheaper. And of course they have. Why?
Because as each day passes the likelihood of a return to the escudo, or Euro Mk II goes up. And exiting the Euro Mk I will mean certain devaluation. That’s why assets like bonds and shares in vulnerable countries continue to suffer.
But here’s the thing. To my mind a Greek default and exit from the euro will be good news. It’s the only way these economies will start to grow again and get out of the mess they’re in.
After countries default, forgiveness follows quickly. In fact, the credit markets get to work practically immediately. Just look at what happened in Iceland. They took the default route and now they’re back and borrowing in the international bond markets.
They’re now in a position to rebuild their economy on the things they do best… which is not banking!
The markets think so too
Here’s a great chart that shows how this story is playing out. It’s the eurozone’s ten year sovereign bond yields and it’s updated daily on the MoneyWeek website.
Let’s focus on the three important lines here. Greece (blue), Ireland (green) and Portugal (purple). Higher yields point to a higher likelihood of default.
There are two things to note. First, just over a year ago, Greek debt soared (the black arrow).
Of course the ECB organised a bailout fund and Greek yields came back down. You’ll notice that Ireland and Portugal both suffered mini-spikes at the same time. And because the EU bailout fund had them in mind, the market relaxed, though it proved short-lived.
And that brings us on to the second point of interest on the chart. Just look at what’s happened in the last week or so. Greek yields have come down, while Irish and Portuguese have gone up.
The market is waking up to the fact that Ireland and Portugal could default and bail out of the euro project. It looks like all three countries may ultimately end up in the same place.
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But Ireland is very different
For Greece and Portugal, I just can’t see how they’re supposed to work their way out of their debt-hole when they’re pegged to a currency that’s just too strong.
But Ireland is a different case entirely. The Celtic Tiger will be back on its feet at some point. They’ve made the structural changes to their economy that allow them to compete in the global markets of the twenty-first century.
Like Iceland, Ireland has been brought down by her efforts to bail out the banks.
Instead of ‘busting’ the banks, they’ve bust the country. And I can’t see why the 4.5m citizens of Ireland will stand by and work-out the debts left behind by a small group of banking elites.
If, and this is still a big if, Ireland slips out of the eurozone and re-negotiates her debts, there could be some serious opportunities for stock pickers.
Just imagine what a lower exchange rate could do for Ireland. We’ve noted before how the lower pound has helped revitalise our ailing industrial sector. Did you see the Chinese Premier Wen Jiabao at MGs Longbridge site yesterday?
Like Nissan’s plants in the North East, UK assembly plants look attractive as labour is cheaper than in continental Europe.
Now just imagine what a devaluation could mean for Ireland. With their favourable corporate tax regime and restructured labour markets, a lower currency will be the icing on the cake.
Bide your time and find the best investments
As I said earlier, there’s certainly no guarantee that Ireland will leave the Union. But if she does, the markets won’t react kindly. And that’s when I’ll be looking for some bargains among the debris.
We could be talking about buying an Irish tracker fund, or perhaps picking up specific manufacturing firms. The thing we’ll have to watch out for are firms with large euro debts.
Devaluation will mean that any debts still denominated in euros may become onerous. That’s why you’ll need to do your homework and pick the right stocks.
While we’re waiting to see how this game plays out, I’ll be running some screens on Irish stocks. I want to see which stocks potentially fit the bill.
And if you have any great ideas on Irish firms that could benefit from a new currency regime, please let me know.
Let’s get prepared. I’ve already started to stock-pile cash. I’m not too worried about a bit of inflation nibbling away at it. In the medium term, I’m looking forward to some very exciting times ahead and a golden opportunity for a second bite of the Celtic Tiger.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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