Europe is one of the world’s biggest markets and rife with investment opportunities.
But the well-publicized problems of the Euro, the recent banking debacle in Cyprus and countries saddled with massive debt have plunged the continent into economic and political turmoil, making potential investors understandably wary. Indeed, unemployment is up, markets are down, and an index of executive and consumer confidence hit a five-month low last month, according to the European Commission.
So what key macro trends should advisors be tracking when evaluating Euro-centric investments?

  • Stability of the monetary union - The pressure on the Euro isn’t going away anytime soon, says Robert Brusca, chief economist for New York-based Fact & Opinion Economics. “What’s happening now is a tug of war between politics and economic forces,” Brusca says. “For the moment, politics, which is keeping the monetary union together, is prevailing. At the same time, economic forces are tearing it apart.”

A key to the direction of the continent’s future will be the economic progress of Spain, Italy, Portugal and Greece, Brusca says. “The big question is will they be able to grow their economies or will they contract.”

  • The German elections – “The weakness of peripheral Europe is now having an important impact on core Europe with German and French macro data deteriorating,” says Virginie Maisonneuve, London-based head of global and international equities for Schroders. “The key will be to watch if the debate moves substantially from austerity towards growth. So far yield on peripheral debt has remained well behaved and has lowered [borrowing] costs for those countries quite substantially.”
  • Corporate credit spreads - Keep an eye on the spreads between yields on corporate bonds issued by Spanish and Italian companies and those issued by German companies, says Rajat Jain, partner and senior research analyst for Litman Gregory. “If the spread widens considerably there is potential cause for concern because the market is pricing in fear and risk,” Jain says.
Charles Paikert

Charles Paikert

Charles Paikert is a senior editor with Financial Planning, a SourceMedia publication.