Prospects for risk assets after Greece

Major markets are relatively flat so far in 2015, but there are some reasons to be optimistic about risk assets such as stocks.

On the surface, things don’t look all that different from last year: growth remains pretty weak and easy money is plentiful — this time in Europe, Japan and emerging markets.

Global investors who have likely loaded up on both equities and bonds by this point are probably trimming their exposure a bit due to concerns about Greece, worsening liquidity and impending rate hikes by the U.S. Federal Reserve.

“Our guess is that investors have sold on the rumour, but will buy on the fact, supporting risk assets as we pass these two events,” said Jan Loeys, head of asset allocation at J.P. Morgan.

Since he thinks any contagion if Greece exits the eurozone will be contained, the more pressing threat to risk markets emanates from coming rate hikes by the Fed. That’s because there is no precedent for the U.S. central bank normalizing rates after such a long period of easy money.

“The typical event analysis of how markets have reacted to past episodes of a first-hike thus cannot be used as a good signal of what to expect today,” Loeys told clients. “Higher uncertainty requires higher risk premia. But beyond the Fed first hike, our best guess is that the world will not have come to an end, and that investors will buy risk.”

How much risk will investors add beyond Greece and the Fed? Probably only a little bit, since they were already long stocks and credit heading into 2015.

Loeys noted the twin risks of the Fed making a mistake in overestimating productivity growth and underestimating inflation risk on one side, and the risk of a debt crisis in emerging markets on the other have him convinced to hold only small overweights in equities and credit.