Like me you are probably a little surprised to see the Dow lower by 213 points and the Nasdaq by 51 points last night to 10991.9 and 2471.5 respectively.  This is despite better than expected US corporate results (TI and Dupont) and higher consumer confidence data for April.  The sharp falls and the rise in the VIX to more than 30 are the result of problems with the PIGS (Portugal, Ireland, Greece and Spain).  Last night, S&P downgraded Greece to junk and also lowered Portugal's credit rating by two notches.   But are the problems that serious ???!!!

Let's try and put the numbers into some perspective before we panic.  The Global economy in terms of GDP in 2009 was US$57.9 trillion with the US leading that list at US$16.4 trillion (28.3%) followed by Japan and China at US$5.1 trillion (8.8%) and US$4.9 trillion (8.5%) respectively.  The economies of Greece and Portugal are US$0.3 trillion (0.6%) and US$0.2 trillion (0.4%) respectively - they are tiny.  Our own Singapore is US$0.177 trillion (0.3%) and we are ranked number 43 in the world economy compared to 28 for Greece and 37 for Portugal.  So while I dont think the problems at Greece and Portugal are significant and therefore unlikely to derail the current global economic recovery, their problems will probably weaken the Euro further and strengthen the US$.

I suspect the major global economic powers will not let problems with the PIGS destroy the fragile economic recovery that has been created.  The amount of money to rescue these economies is also small relative to the money that the US Government doled out to save their banks - so some form of debt rescue will be structured - it will be tough and may lead to political changes in the PIGS but that is the price to pay for not having a prudent Government..

In the short term, stock markets may be volatile and as short rates rise - we should expect more market volatility as we enter the quiet time for the market (May to July).  2009 was an exception - May to July was anything but quiet for stocks.   For medium term value investors - any weakness provides a buying opportunity.  After all interest rates are low, selective stock PERs are in the mid to low single digits - so unless there is another collapse in the global economy - the liqudity should find its way into equities.  Blue chips are likely to face more selling pressure because some of them are currently enjoying a liquidity premium which may disappear as short rates firm.  Just make sure that the companies you are investing in dont have significant markets in the EU and especially the PIGS.  I am comfortable with the stocks in My Stock Picks list - many are on very low PER valuations, have strong balance sheets and attractive dividend yields.