Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
Euro zone stocks could plummet up to 50 percent if Greece makes a disorderly exit from the euro zone, a research note from Societe Generale said on Friday.
In the note, Claudia Panseri, head of equity strategy at Societe Generale, said the DJ Euro Stoxx 50 , an index of leading euro zone shares, could halve if a disorderly Greek exit caused two years of declining profits in the euro zone, plus rising bond yields and equity risk premium.
Panseri said a Greek exit would put France and Germany at risk of contagion as well as peripheral European nations .
“While central bank stabilizing measures are likely to be taken in the event of contagion, with the high correlation among euro zone indices, we believe there would be an increased risk of spillover after a Greek exit from the euro zone,” she said.
According to Panseri, euro zone corporate profits could fall by 20 percent to 30 percent on a Greece exit, due to lower consumption and fiscal tightening in the remaining member countries. Bond yields could widen 100 basis points to 200 basis points.
Pharmaceuticals , food, and tobacco stocks should be the best performing sectors in a contagion scenario, said Panseri, as these have behaved defensively in times of recent sovereign risk, such as between June and September 2011, after Moody’s Investors Service placed Italy’s credit rating on review for a downgrade.
However, she warned that investors should avoid bank stocks. “Financials are the most impacted by the rise in sovereign risk,” she said.
Investors should look for shares for which there is a positive correlation between relative stock performance and sovereign credit default swap levels, said Panseri.
Also attractive are companies with free floating market capitalization above 5 billion euros ($6.26 billion), strong balance sheets, and high exposure to emerging markets (assuming a soft landing in China).
—By CNBC.com's Katy Barnato
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Disclosure information was not immediately available for Claudia Panseri or Societe Generale.