The euro zone crisis has cast a pall over investment markets for the past few years and there is little sign of it improving quickly. But our experts say there are opportunities for the hardy investor.
George Boubouras, executive director, UBS Wealth Management
The euro zone crisis?
The Greek elections and the repair of bank balance sheets have been good news. It is clear there is strong political and financial will for the euro to remain. But more needs to be done. For a European monetary union to be successful it requires not only an independent central bank but a truly independent fiscal union controlled in Brussels.
What can investors do?
It depends on your risk appetite, expected return targets and time frame. There is no doubt that there are some extreme valuations. A more aggressive investor will find plenty of value on a longer term view. More conservative investors should wait, given the elevated volatility. Australian investors need to diversify their portfolios to include multinational companies like Hermès, SAP and Kraft that have great leverage to the emerging economies. Defensive assets have a place in your portfolio.
Graham Harman, director, markets research, Russell
The euro zone crisis?
It is serious and will not be resolved any time soon. Corporate sentiment in areas of relative financial strength are delivering surprises on the downside. With the area representing less than a fifth of world gross domestic product, the region’s woes are not necessarily catastrophic for the world economy, but it is a nerve centre for trade and financial flows.
What can investors do?
Short term, the intractable nature of the euro zone crisis means investors should maintain a defensive stance. With contagion still a real risk, there is little point in taking any exposure to the European sovereign bond market, for example. Likewise, chronic solvency fears in some sectors will dampen enthusiasm for risk assets in shares in Australia and elsewhere for some time.
But those with time horizons of more than a year should note that local and European shares are trading about 30 per cent below fair value.
Kate Howitt, portfolio manager, Australian equities, Fidelity
The euro zone crisis?
The euro zone faces the same challenges of deleveraging as the US: deflating regional housing bubbles, vulnerable banks, parlous finances, high unemployment and stagnating growth. Extended growth rates higher than interest rates are what’s needed. But it’s hard to see a path to this in Europe without clear policy mechanisms.
What can investors do?
Valuations are very reasonable now. The market rarely gets to levels this cheap. When you are buying at levels such as this, you almost always get a positive return, certainly on a multi-year view. Look for income from shares, rather than growth alone.
Michael McCarthy, chief market strategist, CMC Markets
The euro zone crisis?
It is a structural issue – the single currency means there is no external adjustment mechanism for economies performing at different speeds. Monetary responses will not solve the problem. Euro nations must move towards fiscal union, or break up. Europe has the wealth to deal with its problems but its leaders have been acting only at the last minute.
What can investors do?
Experience in markets over the past five years has investors constantly scanning for the next financial disaster. Persistent focus on potential negatives has pushed bonds and shares to extremes. This sentimental rather than numeric approach to investing will reverse.
Sharemarkets in Asia are trading at historically low P/E ratios, pay strong dividends and are in the world’s highest growth region while some bond market prices are at 60-year highs. Investors who trust the numbers will sell bonds and buy shares.
Brian Parker, investment strategist, MLC
The euro zone crisis?
Public debt levels in Greece, even after the restructuring agreed to earlier this year, are unsustainably high. They can’t be refinanced at anything like a reasonable rate of interest, let alone ever repaid. The obsession with austerity is failing. The most optimistic path is for debt restructuring and an enhanced role for the European Central Bank.
What can investors do?
Forecasts about what’s going to happen are likely to be even more unreliable than usual. There will be a market recovery but timing that or assessing how strong it will be is very difficult. Perhaps the best advice for investors is to stay diversified. and that includes having global exposures, despite what’s happening in Europe. There are plenty of high-quality, well-managed businesses out there.
Jason Clout Smart Investor