June 18, 2012 – Gus Cosio Says So

Antonis Samaras and the New Democracy Party won Sunday's election in Greece implying that Greeks chose open-ended austerity to stay in the euro. Most analysts would see this as a relief. It is not the end of the crisis in Europe, but it provides clearer direction of where they are going. At this point, it would be wishful thinking to believe that things are going to get better already. Greeks have accepted to live with economic pain for a number of years more, but as politics go, we do not know how long it will last. What this vote does, however, is that it buys time for economic adjustment. Staying in the EMU and the Euro in effect places the Greek economy in a fixed exchange rate regime with the rest of its EMU trading partners. An exit would have allowed them to make exchange rate adjustments - i.e. float their currency - in order to achieve some kind of equilibrium with the rest of their trading partners. Staying in the Euro, in effect, will have to see the general level of asset prices adjust given the fixed exchange rates. Since the staying in the Euro leaves Greece with an over valued currency, chances are, asset prices as well as wages in Greece will have to adjust downwards. This should make Greece the cheapest place to buy buy property and live for the entire European Community. This all sounds good on paper, but this will have very strong political ramifications in the future. First of all, Greece is already seeing outward migration because of the lack of jobs and low wages in the country. I am sure there will some backlash from other European countries because of cross border irritants. Hopefully, however, given that asset prices in Greece will eventually hit bargain basement levels, some production capacity will migrate to the country and raise Greek productivity. All these will eventually emerge but after some time and pain. In the short run, I believe that markets will see a relief rally particularly in Philippine stocks. We saw a lot of battering last week, particularly last Friday, in what appeared to be a preemptive position cutting by a handful of nervous investors. Some of us may even be thinking that we should have bought what the panic seller was dumping. I think it was good that prudence saved the day. Remember, this country is not Greece and Southeast Asia is not Europe. China, as well, is not in dire straits as a number of European economies. I think the present situation will be pulling more capital in this direction especially because productivity in the country is intact, and the prospect of growth is tenable. I maintain the view that the Philippine capital markets is a very sound place to be. I will also argue that at this point in time, any investor that does not have a significant allocation in Philippine equities is not doing himself or herself a favor. I am not looking into the short run with this view. I think I am running a marathon with this investment idea.