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Is your portfolio prepared for a Grexit?

Credit: mariusz kluzniak

So you thought the world revolved around the Sun….

Wrong! It actually revolves around Greece, as the headlines this morning clearly indicate:

“Shares little changed amid Greek drama”

“Markets set for turmoil as Greece raises stakes”

“Equities mixed as Greece impasse persists”

“Debt talks may be defining moment for Greece”

“Greek debt crisis: Tsipras in intensive talks with creditors”

Why doesn’t anybody say “We’ve had enough!” and kick the Greeks out of the Eurozone?

There’s a 95%* probability that if the Australian government was pouring so many billions of debt into the black hole that is Greece’s financial situation, the elected party would have been dragged out of parliament house and dispatched with.

(* statistics are made up)

Our S&P/ASX 200 (INDEXASX: XJO) has been on a bit of a bumpy ride lately, it’s true. But what are the real impacts going to be on the Australian stock market if Greece completely collapses?

Very little is going to change. Most of our companies with Euro earnings like Westfield Corp Ltd (ASX: WFD), Macquarie Atlas Roads Limited (ASX: MQA) and Domino’s Pizza Enterprises Ltd. (ASX: DMP) make their money elsewhere in the Eurozone. Does Greece really make a material contribution to the financial wellbeing of the Eurozone or any of our companies with Euro earnings?

Given that the situation is such a shambles, it’s hard to argue that it does.

As I noted in recent articles, there are several very appealing ways to play a Greek Eurozone exit through Exchange Traded Funds like ISHEUROPE CDI 1:1 (ASX: IEU) and BetaShares Euro ETF (ASX: EEU) which represent Euro stocks and the Euro currency itself, respectively.

The worst case scenario I can see is that Greece exits the Eurozone, which begins a round of uncertainty in currency investors who abandon the Euro for currencies like the Yen, US Dollar, and Australian Dollar.

This will put upwards pressure on the AUD at a time when we least need it, reducing the profitability of companies like Santos Ltd (ASX: STO) and Rio Tinto Limited (ASX: RIO), who are already grappling with reduced commodity prices.

A ‘Grexit’ might also inspire struggling countries like Spain and Italy to exit the Eurozone rather than comply with uncomfortable monetary reforms designed to grow their economies – putting further downward pressure on the Euro.

I wouldn’t be surprised to see a widespread Euro stock sell-off in the wake of either event, and I think this would represent an excellent time for investors to consider geographically diversifying their portfolio.

Also put me down on record as saying now is a fantastic time to invest in certain sectors of the Greek and Spanish economies. Low wages and high unemployment mean high-quality staff can be trained and retained for cheap, and if you’re in sectors like export manufacturing or tourism, demand for your product won’t be much affected.

As ever there are two sides to the story, and one man’s disaster is another’s opportunity – the key is preparation.

How will YOU handle a ‘Grexit’?

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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