While most financial markets were spared selloffs Monday, it was hardly a good day in equities -- especially those perceived as vulnerable to Greek contagion.
Stocks in Italy and Portugal fell more than 3.8 percent, and benchmark indexes in Spain and France lost 2 percent after voters in Greece rejected bailout terms. The gauges slumped further on Tuesday. More than half of the 18 western-European markets tracked by Bloomberg are now in corrections, with shares down 10 percent or more from their 2015 highs.
The Greek crisis is overwhelming equities that before the second quarter had been basking in the European Central Bank’s asset-purchase program. With stock volatility up 73 percent from a low in February, investors are waiting for calmer days before adding to equity positions.
“There is clearly some fear about any kind of contagion,” said Francisco Salvador, a strategist at FGA/MG Valores in Madrid. “The Greek issue has not only punished markets in some of the most fragile European economies -- like Portugal or France -- but also dragged Germany and Spain down too. What’s bad for Greece is bad for Europe.”
Equity markets have been grinding lower since April as negotiations between Greece and its creditors stalled. The biggest gainers of the first quarter fell the most during the selloff. Germany’s DAX Index and the Portuguese benchmark gauge entered corrections on June 8.
Since Greek Prime Minister Alexis Tsipras announced a referendum on creditors’ demands, stocks in Europe’s periphery have suffered the most, with markets in Italy, Portugal and Spain losing more than 7 percent. Cash levels among European fund managers are at a six-year high, and the Euro Stoxx 50 Index, which rallied as much as 22 percent this year through its April peak, has lost half of its gains.
While the gauge’s 2.2 percent decline on Monday was far from the 4.2 percent slump it posted a week earlier, the index closed at a five-month low. It trades at 14.5 times estimated profit of its members, the lowest valuation since February.
Spain’s IBEX 35 Index and France’s CAC 40 Index ended 11 percent lower than their highs in April. Italy’s FTSE MIB Index has lost 10 percent from its peak that month, while Portugal’s PSI 20 Index has slumped 15 percent since then.
“It’s purely Greece-related,” said James Buckley, who helps oversee about $43 billion at Baring Asset Management in London. “We need more clarity on the Greek situation before adding to peripheral Europe.”
The markets that led Europe’s stock rally in the first quarter are seen more at risk as sentiment turns. Italy and Spain are dealing with anti-austerity movements at home. With general elections in Spain later this year, concern is growing that the nation may follow Greece’s path.
The Spanish index is up 2.5 percent in 2015, less than the 7 percent advance in the Euro Stoxx 50. That’s even as economists predict the country’s gross domestic product will expand 2.8 percent this year, double the rate of 2014 and faster than the pace of growth in the U.S.
“We’re ready to jump back into the Spanish market, but too much still depends on the severity of the outcome on Greece,” FGA/MG Valores’s Salvador said. “It’s too soon to call the correction overdone.”
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