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Greek Fears = Buying Opportunity

THE WEEK: Morningstar columnist Rodney Hobson reviews the ongoing drama in Greece and discusses his bullish view on Sainsbury

Rodney Hobson 11 May, 2012 | 11:33AM

Greek Fears = Buying Opportunity
As Greece implodes, perceived wisdom goes out the window. Why did stock markets react so badly and why has the price of gold not soared? Many so-called experts have a lot of questions to answer.

I have consistently argued in this column that membership of the euro was not the cause of Greece's problems and that dropping out would not be a solution. Many readers have emailed me to disagree with this stance.

While I always genuinely welcome opposing arguments, I must now raise this issue: since the inconclusive general election, the possibility of Greece reneging on its agreement with the EU, the termination of the bailout, a full default on Greek sovereign debt and the return of the drachma are now a serious reality. If this is a solution, why have the markets taken fright?

The answer is that investors fear that this 'cure' is even worse than the EU's unpalatable medicine. They are right.

Some readers have pointed out that Argentina and Iceland both reneged on their debts and have subsequently recovered. Neither now has access to the capital markets and I wonder why Argentina feels the need to confiscate foreign-owned businesses if its economy is going so swimmingly.

In the case of Iceland, the main problem was the unsustainable mushrooming of the banking sector which made dubious loans. This has been dealt with and Iceland is genuinely recovering. You have to deal with the underlying issues, otherwise one economic disaster follows another.

Back to Greece. Nothing has been solved and there seems no likelihood of anything being solved. But that was the position a week ago, a month ago, a year ago, so why should the Footsie be 300 points lower now than it was last month?

The answer is that the market can be highly irrational. The fall in share prices represents a buying opportunity, with prospective yields now higher than they were.

The reaction of gold to the Greek crisis is instructive. Gold is supposed to be a safe haven in times of crisis. Well, this is a crisis and yet gold has slipped below $1,600 an ounce. It is also lower in sterling terms despite the easing of the value of the pound against the dollar.

Gold enthusiasts should face the fact: gold is not a safe haven. It is a high risk punt that depends entirely on panic to produce a profit.

Nuts in May
Another favourite theme of experts is trying to prove that selling stocks in May and not buying back into the market until September is a good idea. In terms of movement of stock market indices, it works no more than half the time.

However, the drawback of selling and staying out of the market for four months is that you miss out on all the dividends paid in the meantime. As it happens, dividend payments are heavily concentrated in May, June, July and August as shown in my new book, The Dividend Investor.

The experts have been out in force again promoting the daft idea that selling in May works. Ignore them.

Shop at Sainsbury and Buy Sainsbury Shares
I have long advocated Sainsbury (SBRY) as a better alternative to Tesco (TSCO) and have put my money where my mouth is by topping up my holdings out of this year's ISA allowance.

After results this week showing sales are up by 6.8% and profits excluding exceptionals are up by 7.1%, I am already regretting my timidity in not investing more. My caution comes from the fact that my exposure to Sainsbury is already greater than to any other company.

The final dividend of 11.6p makes a total of 16.1p, up 6.6%, and I am pleased that Sainsbury proposes to improve dividend cover from 1.75 to 2 times, as that makes the dividend more secure. The prospective yield for 2012-13 is 5.4%, rising to 5.8% in the following 12 months.

I cannot understand why the shares remain static but that means there is still an opportunity to invest further. It is very tempting to do so.

In Sympathy
Nightmare on High Street is coming to a shopping centre near you. Clinton Cards, with more than 700 shops and 8,000 staff, has followed Woolworths into receivership. Clinton collapsed under the weight of debt and rent bills.

Plenty more chains are rattling in town and city centres. Retailing is not a great place to be and you would want as really good reason and a really solid company (see Sainsbury above) to invest. Otherwise, stay well clear.

Shoot the Messenger
I have endeavoured to reply to all the many readers who have, over the years, emailed in their comments on this column. I apologise to anyone who failed to receive a response.

Now, thanks to the wonders of modern technology, you can add your remarks onto my column on the website, which gives you a wider audience. You can add your comments below and I am always checking the site to see what you have to say. Please keep the comments flowing.

Weekly Market Movements
Tuesday 8 May - Friday 11 May

FTSE 100: -2.32%

FTSE 250: -1.96%

FTSE All Share: -2.27%

FTSE Small-Cap: -1.06%

FTSE Fledgling: -1.68%

FTSE AIM 100: -2.36%

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About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.