Greece votes: 3 ways to protect yourself from a European disaster

The ASX is rallying as the Greeks vote for the euro. But shares will remain volatile.

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published June 18, 2012 12:20 pm AEST

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and the All Ordinaries (Index: ^AORD) (ASX: XAO) have jumped 1.5% on Monday morning in a large relief rally.

Greece returned to the polls over the weekend, and preliminary results are in. According to the Australian Financial Review, pro-bailout New Democracy leader Antonis Samaras has declared victory, after counting gave the conservative party a slender lead over radical left party Syriza.

Greece's government broadcaster aired projections that would give New Democracy 29.5% of the vote, Syriza on 27.1% and another pro-bailout party, Pasok with 12.3%, while the Democratic Left had 7.6%.

In a speech to supporters in Athens, Samaras declared that Greece would continue to honour the commitments it has made to the European Union and the International Monetary Fund, under a crucial bailout package.

While some thought the election might lead to a dramatic breakthrough, the reality is that there will now be negotiations among Greek parties to form a governing coalition. And that will be followed by weeks of negotiations between Greece and its creditors. Today was an important day for Greece, but the election results reveal an extremely divided electorate. Whether an effective governing coalition will emerge is a huge unknown right now.

What does this mean for stocks?

For Australian investors, this will probably mean increasing volatility (as if we didn't have enough). While the market has responded positively in early trading this morning, shooting up 1.6%, the Greek election result has not been finalised and there's still plenty of work to be done before Greece gets out of trouble – and there's still a big question mark over that.

The larger Eurozone crisis seems to be worsening by the day. At the moment, it's hard to see a positive outcome to the troubles facing Europe, and that will continue to act as a brake on global economic growth. Equity markets in Australia and overseas will ultimately reflect that pessimism over the next several months at least.

Now what?

I have absolutely no idea how this crisis will play out in the end. Martin Wolf of the Financial Times — who is one of the finest commentators on European economic affairs — feels equally uncertain about what will happen next. He wrote recently:

How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the Eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.

With all of this uncertainty around a crisis that could eventually lead to a depression in Europe and another severe recession around the globe, here are three possible ways investors might protect themselves from the worst-case scenario in Europe:

Have a long-term time horizon: US Motley Fool co-founder Tom Gardner made the point recently that "long-term thinking is our greatest competitive advantage." And he's been telling investors to hold stocks for at least five years and beyond. In my opinion, markets are likely to be extremely volatile in the coming months, so having a long-term strategy will be critical to riding out a near-term market downturn. Now more than ever, investors should commit to a long-term holding period.
Look for dividends: With the S&P/ASX 200 Index down 8.2% since a year ago, this presents great opportunities for investors looking for less risky high yielding ASX stocks. QBE Insurance Limited (ASX: QBE) and Coca-Cola Amatil Limited (ASX: CCL) are two other large cap stocks that provide solid high yields. QBE should recover from its 2011 horror year and the possibility of decent capital gains is also enticing. Coca-Cola Amatil has one of the strongest brands, and plans to expand its business further into beer and alcoholic beverages, which should see its share price rise on the back of increased earnings. Stockland (ASX: SGP), Sonic Healthcare Limited (ASX: SHL) and Sydney Airport Holdings Ltd (ASX: SYD) are other possible contenders.
Don't panic. Despite Martin Wolf's opinion that panic might be quite rational right now, investors should not take that as advice. Selling at the bottom of the market is the one thing you should never do. There may be a few days in the coming months when it feels like the global economy is spiraling out of control. That would be precisely the time to stand firm. It's happened countless times before, such as March 2009, just prior to the market beginning its very steep rise upward again.

So, what's next?

I think most of us would agree that things look pretty grim at the moment. The Eurozone is on the verge of collapse, and China appears to be slowing down. America's political and economic problems are extremely serious, too.

That's why I'm pessimistic in the short term. In the long run, though, I remain an optimist — which is why I'm continuing to invest, even though it looks scary out there.

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Motley Fool contributor Mike King owns shares in QBE. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by John Reeves, was published on Fool.com. Mike King has updated it.

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