Five tips to surviving the Euro crisis

Five tips to surviving the Euro crisis
14 June 2012

FOR months now, negative headlines surrounding the Eurozone’s entrenched economic woes refuse to go away, but how worried should investors be?

The political backdrop in Europe has been horrible; election results in Greece have reignited the debate about whether the country will be forced to leave the Eurozone, while the victory of pro-growth Francois Hollande in the French presidential elections has raised some concerns about France’s austerity commitments.

The longer-term structural perspective for Europe still looks challenging to say the least. However, political surprise can cut both ways and better news out of Greece or the announcement of some sort of new bailout agreement could be an obvious trigger for a spurt of European equity outperformance.

Despite the current gloom, investors should be wary of allowing well-documented problems in the Eurozone to cloud their views of global equity markets. A number of considerations support a more balanced view towards global equities, and some canny moves can help keep your portfolio on the right track...

1. See the big picture

The Eurozone accounted for only 14% of global gross domestic product (GDP) in 2011; its problems should not prevent the broader global economy from growing at a respectable pace as many parts of the global economy are performing well, including the US economy and many emerging markets.

Just as was the case with Japan back in the 80s and 90s, it can be argued that the economic weakness in the Eurozone can keep a lid on global commodity prices, which allows the rest of the world to grow more strongly for a sustained period.

2. Keep it in perspective

Many of the most problematic countries are economically insignificant in terms of size. For example, Greece accounts for only 2% of Eurozone GDP and less than 0.5% of global GDP.

3. Recognise the strong performers

Even within the Eurozone, the story is not universally bad. The German economy and many German companies have actually performed remarkably well throughout the crisis period.

4. Be diversified

Good asset allocation is hugely important, especially in times of high volatility. A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, so diversification reduces the overall risk in terms of the variability of returns for a given level of expected return.

Large global and intra-Eurozone economic differences completely underscore the importance of good asset allocation. For example, investors who are overweight US equities and underweight the Eurozone’s problem countries have enjoyed good returns: US equities are up by my more than 8% since the start of the year.

5. Don’t take your eye off the ball

If you have an existing portfolio and it hasn’t been reviewed for some time, speak to your adviser with a view to rebalancing your investments based on your attitude to investment risk.

The world keeps on becoming a different place so it’s important that you align your investments to incorporate these developments. Like anything in life, if you do not look after something it will not continue to work properly – and this applies to your investments.

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What's your top investment tip amid the Eurozone crisis? Tell cashy...


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