Investors heaved a huge sigh of relief, when Greek voters on June 17 gave a narrow victory in parliamentary elections to the center-right New Democracy party (ND), which supports austerity measures designed to bailout the country’s troubled economy.
ND won 30% of the vote; the Coalition of the Radical Left (Syriza), vowing not to implement tough austerity measures, produced a strong second-place finish, with 27%. The Panhellenic Socialist Movement (PASOK), a center-left party, captured about 12%.
Global markets have been watching Greece with bated breath ever since the small country first held inconclusive elections in early May. The main worry has been that Syriza would either win outright or cobble together an anti-bailout majority, forcing Greece into a scenario referred to as “Grexit,” a disorderly exit of the euro.
Investors could hardly have hoped for a better electoral outcome. ND and PASOK – Greece’s two main parties and traditionally rivals – will likely pull together a coalition government that pushes through needed reforms. EU leaders already are indicating that they may grant Greece additional time to implement austerity, to reduce the palpable public resentment as expressed by Syriza’s strong showing.
However, with a population of only 11.5 million and an economy the size of Maryland, Greece is a sideshow.The real issues for the single currency remain the far larger economies of Spain and Italy.
Spain has secured a bailout of its troubled banks and Italy has made progress on austerity and reform. However, borrowing costs for both governments remain uncomfortably high. In the wake of Greece’s vote, Spanish 10-year borrowing costs reached euro-era record highs, a sign of weakening confidence in Madrid’s ability to repay its debts.
Slow progress in Europe, softening US economic data and a looming US presidential election will cap any rallies in stocks this summer.
When growth is sluggish and global credit markets uncertain, even the strongest companies can stumble. A balanced portfolio of dividend-paying stocks should include as many different sectors as possible, from energy producers, telecoms, utilities and MLPs to real estate investment trusts, health care and financials. This diversification should extend to currencies as well, with particular focus on the natural resource-following Canadian and Australian dollars.