May 31, 2012 / 6:55 PM / 5 years ago

HOW TO PLAY IT - The run-up to the Greek election

NEW YORK, May 31 (Reuters) - For the second straight summer, politics look to be dictating the market's moves.

A year ago it was the Aug. 2 deadline to raise the U.S. debt ceiling. This time around, market strategists and analysts have circled June 17 as a key date.

That's the day parliamentary elections are scheduled in Greece, which may determine whether the country continues to accept austerity measures as part of its bailout plan or may lead to it leave the 17-member bloc of nations that use the euro.

Polls suggest the election will be close, leaving investors in the lurch. Concerns about possible fallout from the Greek election have helped put the S&P 500 on track to close out May with its worst monthly performance since September, analysts said, and the yield of the 10-year U.S. Treasury hit the lowest point ever on Thursday for records that go back to the start of the 19th century.

"It's a classic case of uncertainty. If Greece collapses and Europe goes into a deep recession, you don't know how much further it might go. That unanswerable worry is keeping potential buyers out of the market," said David Kelly, chief global strategist at JP Morgan Funds.

Yet some analysts remain optimistic that the outcome of the Greek election may provide opportunities.

Looking for Balance

Kelly said he expects the global stock market to stage a "significant rally" if Greece's conservative pro-bailout New Democracy party wins the election.

He cautions, however, against making a big bet on a positive outcome. Instead, he said, investors should ensure that their asset allocation is balanced between exposure to stocks that could benefit from a positive outcome and bonds that provide a measure of stability.

"If you are in a boat in stormy seas, the best place to be is in the middle of the boat," he said.

Jerry Webman, chief economist at Oppenheimer Funds, agreed that investors shouldn't rush toward assets that are traditionally considered safe havens. Ten-year Treasuries "do not have value" at their current yields, he said.

"I think that the biggest risk to the U.S. stock market is a pattern of good news that catches people unawares. Clearly people are doing whatever they can to be defensive right now," he said.

Investors could instead consider a balanced fund like the $1.3 billion Manning & Napier Pro-Blend Moderate Term fund , which has about 51 percent of its assets in bonds, 32 percent in U.S. stocks, 12 percent in international stocks and the remainder in cash, according to Morningstar.

While the fund has a significant stake in both U.S. government and corporate bonds, its holdings are more diversified than its competitors. Nearly 10 percent of its bond portfolio is in Canadian fixed income, well above the category average of 1.5 percent, according to Morningstar.

The fund has returned an annualized 2.2 percent over the last five years, or 1.5 percent more than its category, according to Morningstar. It charges an expense ratio of $1.07 per $100 invested and yields 1.45 percent.

Investors looking for a passive investing option could consider the $16.1 billion Vanguard Balanced Index fund , which is tilted more toward U.S. stocks than the Manning & Napier fund. U.S. stocks make up approximately 59 percent of its portfolio, international stocks make up just 0.4 percent, while bonds make up approximately 37 percent, according to Morningstar.

The fund has returned an annualized 2.9 percent over the last five years, or 2 percent more than its category, according to Morningstar. Vanguard's popular Vanguard 500 index fund, by comparison, has returned a negative 0.95 percent over the past five years.

Vanguard Balanced Index fund charges an expense ratio of 10 cents per $100 invested and yields 2.1 percent.

Waiting for Opportunities

Some investors are sitting on cash and waiting for the Greek election to pass before making any big moves.

Jeffrey Kleintop, chief strategist at LPL Financial, said his team recently raised its cash stake by 20 percent in light of the low yields for Treasuries and the slide in the price of gold, which is on pace to close out May with a decline of 6 percent.

"It's hard to buy the safe havens now given how expensive the 10-year Treasury is and how gold has been trading," he said.

Kleintop is waiting until after the Greek election to increase his position in emerging market stocks and commodities like copper, silver and agriculture.

"We're further along in the commodities correction than in equities or the bond market," he said, noting that some commodities have pulled back 20 percent from their most recent highs.

The $2 billion iPath DJ-UBS Commodity Index ETN is one option for a broad-based bet on commodities. The fund limits its exposure to energy commodities to a third of its portfolio, and has significant stakes in agricultural commodities and industrial metals, according to Abraham Bailin, an analyst at Morningstar.

As an exchange-traded note, the fund is exposed to the fate of its issuer, Barclays Bank. The bank's current credit rating is excellent, Bailin noted. The bank has an A rating from S&P, according to Thomson Reuters data.

The fund, which charges 75 cents per $100 invested, is down 9.3 percent so far this year.

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