As we reported earlier [9], the largest Swiss bank UBS - which would certainly be a primary gatekeeper to trillions of capital inflows into Switzerland should the Eurozone collapse - is hardly sanguine on the current Grexit episode, and, in slightly more diplomatic words, suggests you panic.
This how UBS phrased it:
Although we remain constructive on the medium term regarding "risk asset" fundamentals we are increasingly concerned about market complacency regarding near-term Greece risks. Indeed, as noted above, market corrections or dislocations may be required to motivate both Greece and the troika toward compromise. Moreover, equity markets have dwindling upside but greater volatility. Our yearend target for the STOXX Europe 600 index is 380, and we are almost at that target.
We therefore believe it is correct to tactically reduce risk. Our revised allocations are as follows:
[10]
And while UBS' big picture risk pessimism may not be everyone's cup of tea, those curious how to trade each individual step of a potential Grexit are urged to read the following:
The main impact from a 'Grexit' scenario would be a jump in risk aversion. The preceding analysis suggests that investors would view Greece as idiosyncratic risk. We, in contrast, would have few doubts that 'Grexit' would trigger a broader jump in risk premiums. We analyse the outcome via an investment clock, dependent on risk aversion. Figure 16 depicts the dependency of asset class performance on the level of risk aversion as well as the change in risk aversion.
[11]
The only asset class that would provide protection in the event of a generalised rise in risk aversion would be US Treasuries (we noted in previous research that it would also be the best protection against an economic downturn).
More interesting is to consider a relative performance, as most investors are constrained on how short they can go. We allow allocations between -30% (short) and 120% (levered) to permit some limited short positioning. The figure below shows maximum Sharpe ratio portfolios with optimal allocations to various scenarios based on the level and momentum of the UBS Global Risk Index. Currently, we are in the “medium and falling” risk appetite regime where historically it has been best to short equities and European investment grade corporate bonds against overweight allocations to developed market government bonds and US high yield corporate bonds.
What happens next is the question. Here is UBS scenario analysis going from the situation "now" to the three possible Greek crisis scenarios, to the world just after, which is really one of two possible outcomes: Risk On or Risk Off.
[12]
