While relief over Greece prompted the biggest European stock rally since 2011, the legacy for investors is volatility.
After slumping to a five-month low, the Euro Stoxx 50 Index rebounded 9.5 percent in five days, falling as much as 0.5 percent on Tuesday before ending up. Its average daily move now stands at 1.7 percent in July, the most in almost four years. Portuguese and Italian shares led the swings, with average gains or drops of about 2 percent each day.
“We’re by no means out of the woods yet, and markets are fully aware of that,” said Rosamunde Price, who helps oversee about $14 billion as chief investment strategist at Seven Investment Management in London. “Investors have enjoyed a nice rebound in the run-up to a settlement, but the mood this week is still pretty cautious. Remember that peripheral stocks can nosedive as easily as they can rally.”
The first hurdle comes Wednesday, when Greek Prime Minister Alexis Tsipras needs to secure parliamentary approval for the austerity measures demanded by creditors to begin talks over financial aid. With the long-term stability of the country’s economy and its government at stake, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are among those saying that risks remain.
“We’re not there yet,” Antonin Jullier, global head of equity trading strategy at Citigroup in London, told Manus Cranny on Bloomberg Television. “The real tension and pressure will come later in the year, when you start getting debt sustainability studies and when you go for a proper third bailout agreement. We’re still going for Grexit being the most likely outcome on a one- to three-year horizon.”
Shares in Europe’s most fragile economies, or those with some of the largest debt burdens, have seen the steepest declines when things turned sour.
With Greece’s stock exchange closed since June 29, selling spread across so-called peripheral markets amid fears a full-blown crisis could derail their recovery.
Benchmark equity gauges of Italy and Portugal slumped at least 10 percent from the Friday close before Tsipras announced a surprise referendum on creditors’ demands to a low on July 7. Then prospects of a solution buoyed those shares, which rebounded almost 11 percent in the following four days. On Tuesday, they fell the most among western-European markets.
Michael Kapler at Mittelbrandenburgische Sparkasse is among those remaining calm, saying the Greek saga won’t halt Europe’s recovery. Economists forecast the region’s economy will expand 1.5 percent in 2015, the most in four years, and 1.7 percent in 2016.
That will help support earnings growth, with analysts projecting profits at Euro Stoxx 50 companies will increase more than 10 percent a year through 2017.
“You need to step back from the noise and look at what’s actually happening in Europe,” said Kapler, an equity manager in Potsdam, Germany. “I’m positive on euro-area stocks and Greece hasn’t changed any of that. The selloff has given us some good buying opportunities. If you’re happy to live with higher volatility, then the rewards will be big.”
The Euro Stoxx 50 trades at 15.5 times estimated profits of its members, compared with a high of 16.5 in April.
Still, Greek obstacles will persist, threatening European shares, according to Eric Lascelles, Toronto-based chief economist at Royal Bank of Canada Global Asset Management.
The 32 percent slump in the VStoxx Index, a measure of expected Euro Stoxx 50 volatility and gauge of investor concern, came quickly -- it was its biggest four-day plunge in five years. The gauge is now at its lowest level since March 2013 relative to actual equity price swings over the past 20 trading days.
Portugal’s PSI 20 Index is still down 8.8 percent from its high in April. Italy’s FTSE MIB Index has regained most of its losses, but the cost of options hedging against declines in the next month is near a three-year high relative to bullish contracts, indicating that concerns remain.
“There is still ample room for error,” Lascelles said. “If Greece does not leave over the next year, there then remains significant risk that the country stumbles at some later juncture and is unable to recover within the constraints of the euro zone. In short, this is not likely the last we have heard of Greece.”