How to play the Eurozone

How to play the Eurozone
17 June 2012

THIS promises to be a decisive time for Europe and the decisions taken this month by European Union leaders should guide investors on how to move forward.

Here, cashy asks a trio of investment experts for their views on the Eurozone – and how investors should position their portfolios.


The stock market decline over the last couple of months has largely been attributed to escalating concerns over the European debt crisis and fund manager BlackRock believes that Europe remains the chief variable in determining the future direction of the global economy.

Chief equity strategist Bob Doll says: “If Europe’s debt crisis remains reasonably well contained, the world should continue to grow at a modest pace with the United States doing relatively well; if debt contagion becomes chaotic and uncontrollable, it would be an entirely different story. Our view continues to be that the former scenario is the more likely one.”

BlackRock believes that the global economic growth will remain “acceptable” with conditions gradually improving in the second half of the year. Therefore, the outlook for risk assets – such as shares – continues to be “a positive one”.

“The combination of the rising equity risk premium, falling stock prices, improving corporate earnings and lower Treasury yields means that stocks have become quite cheap relative to bonds,” says Doll. “Assuming that the world is not headed for a renewed deflationary spiral, there is little doubt in our view that stocks are poised to provide superior long-term returns over bonds given their current levels.”

He adds: “There is still quite a bit more that needs to be done on the part of policymakers around the world to take the necessary steps, but the trends are pointing in the right direction.”

deVere Group

Nigel Green, chief executive of the deVere Group, the independent financial advisory firm, believes the stock market will trade sideways for the foreseeable future, but says history proves there are significant opportunities in times of turmoil.

“We’re at a pivotal point in the Eurozone crisis. If the authorities ‘drop the ball’ then we could see a repeat of the 2008-09 banking crisis,” he says.

“However, it appears that the authorities are finally seeing the seriousness of the situation and will act. If they act aggressively we will see a decent rally; although I believe that this stress intervention period will continue over the next few years.”

So what does this mean for investors? Green urges investors to ensure their portfolios are well diversified.

“In general terms, we believe that diversification is key in the current environment as it will reduce risk and boost returns,” he says.

“In addition, those who are keen to take a long-term stance on their investments can use the uncertainty to their advantage as volatility tends to shorten many investors’ horizons. For instance, as most rush to buy assets such as government bonds, equities become cheaper, meaning that those who take a long-term view can benefit enormously at this time.”

Baring Asset Management

Barings, the international investment firm, is less optimistic. It has moved progressively to more defensive asset classes, such as cash and developed government bonds, in its multi-asset portfolios in light of the Eurozone crisis.

Percival Stanion, head of asset allocation, says: “We hadn’t been expecting much from Europe but even our expectations relative to the consensus seem overly optimistic today as the strains on the European financial system grow, particularly in places like Spain.”

Barings’ multi asset team has maintained its support for the US dollar and adopted a more cautious approach to equities, particularly to economically-sensitive areas such as materials and industrials, while upgrading defensive sectors, such as healthcare.

“We’re taking the necessary steps to protect our assets from what we see as increasingly stifled European economic growth,” says Stanion.

Barings remains a fan of the US, where it expects to see growth despite looming public sector spending cuts at the end of the year. In Asia, it favours Japan on the back of its rebuilding programme following last year’s earthquake and nuclear incident. In contrast, it believes China continues to disappoint with the recent weakness in Asia’s largest economy bringing significant downward pressure on industrial commodity prices, including oil.

A combination of policy stalemate in Europe, US spending cuts and Chinese inertia mean that there is an increased chance of the global economy slipping back into recession.

Stanion adds: “Markets increasingly look to policymakers around the globe for leadership and policy clarity. In an environment where clarity is in short supply, it is likely that markets will remain volatile and risk premia elevated.”

Want more advice on surviving - even profitting from - the European debt crisis? Check out our five top tips.

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What are your views on Europe and how have you positioned your investments?


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Freelance editor and journalist
mediahill Ltd
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