The ongoing financial instability in Greece illustrates the kind of quicksand you can step into if you’re contemplating any kind of European investment. Despite eurozone finance ministers’ attempts at putting Greece on a sustainable track, creditors have had to accept large losses. Private sector bondholders have taken a more than 70 percent hit on their holdings in Greece, and while the country has so far averted a catastrophic default, the future is all but certain.
The Greek debt crisis is the latest in the so-called PIIGS nations (Portugal, Italy, Ireland, Greece and Spain) that have been among those hit hardest by the global recession. Pundits have suggested Greece should simply be cast adrift from the eurozone and that any new bailout funds should instead go to Portugal, which has continued to struggle with debt despite its own bailout last year from the European Union and the International Monetary Fund.
European stocks offer opportunities, risks
Only nine European countries — Denmark, Finland, Germany, Luxembourg, Netherlands, Norway, Sweden, Switzerland and the U.K. — currently hold perfect debt ratings from all three major rating agencies after Standard & Poor’s downgraded France and Austria in January.
So, with so much financial shakiness in Europe, should U.S. investors look for opportunities over there? Experts say yes — but tread carefully.
“In theory, no one would eagerly jump into companies or countries with high levels of debt,” says Tom Lydon, president of Global Trends Investments. “However, much of Europe’s market has already priced in their financial problems. With the situation stabilizing, this could become a good opportunity for risk-tolerant investors.”
Overall earnings growth in European countries has been pretty good, and investing in individual stocks in such consistently strong sectors as technology and manufacturing may be the wisest choice, Lydon says.
How about European mutual and other funds?
Investors considering mutual funds in Europe should exercise restraint, says Roger Nusbaum, portfolio manager and chief investment officer at Your Source Financial. “With actively managed funds, there is no way to know what they own right now due to the reporting lag — and obviously no way to know what they will own in the future.”
Nusbaum also is bearish on European country exchange-traded funds, which are essentially index funds that trade like stocks. Dipping a toe into a European country — or even the region — via an ETF at the moment is something of a fool’s errand, he says. “The economies and banking systems are a mess. The European Central Bank is taking desperate action to try to fix it, but these actions carry a risk of future negative consequences.
“Most country funds are very heavy in financials, which I believe is by far the least attractive sector — thus making the country funds unattractive,” he adds.
Looking past the PIIGS
Staying away from the weaker economies would seem to be a smart strategy for investors. The nine nations with spotless credit ratings mentioned earlier have navigated these troubled waters with aplomb and are attractive “from the top down for people interested in country funds,” Nusbaum says.
As for currency concerns, while the U.S. dollar is on weak fundamental ground, the euro appears to be even worse off. The more exposure to the euro — either through a currency ETF or through equity or bond exposure — the more risk to a portfolio should the euro go down.
Lydon of Global Trends Investments suggests investors keep an eye on interest rate moves by the European Central Bank and Bank of England. Action to bring down rates generally hurts a currency, though lower rates also will improve the outlook on equities, he notes.