Whatever happens to the euro, European stocks look cheap
John Stepek Jun 06, 2012
Every Bank Holiday weekend, I half expect the Europeans to sit down and do something about the eurozone crisis while everyone else is out of the office.
It would probably have been a bit rude to distract from the Queen’s Jubilee this weekend by slinging Greece out of the eurozone, or deciding to print bucket-loads of euros, or both. But it’d have made markets a lot cheerier this week.
Instead we’re left in the usual euro-limbo, waiting for the politicians to make their next move.
However, there’s one big difference between this latest euro-crisis and all the others. And it could spell opportunity for bold investors…
Europe’s latest crisis is the worst yet
Europe has suffered many ‘make or break’ moments over the last three years or so. Each has been more serious than the last. And the latest is the most serious of all.
The Spanish prime minister, Mariano Rajoy, has publicly acknowledged that his country needs help to recapitalise its banks. Spain can’t afford to do it itself. As the Spanish budget minister also admitted yesterday, Madrid “does not have the door to the markets open.”
That’s quite a worry, given that Spain is planning to try to borrow as much as €2bn in the markets tomorrow.
So what’s the solution this time? In recent years, we’ve had lots of talking, a pitifully inadequate bail-out fund, and some half-hearted money printing from the European Central Bank.
Now the focus is on creating a Europe-wide banking union. As The Economist puts it: “At a minimum there must be a eurozone-wide system of deposit insurance and oversight, with collective resources for the recapitalisation of endangered institutions and regional rules for the resolution of truly failed banks.” In other words, if banks needed bailing out, the whole of Europe would do it, rather than one country.
Spain also wants Europe to issue ‘eurobonds’ – debts backed by everyone in the zone.
Trouble is, the people who’d end up paying for the lion’s share of this – the Germans – don’t like the idea. At least, they don’t want to do it unless it’s very much on their terms.
They’re not willing to give Spain bail-out money unless it formally requests a bail-out. But Spain doesn’t want to do that, because it doesn’t want to accept the IMF-imposed conditions that would come with any bail-out.
And we’ve still got a completely unpredictable Greek election coming up in less than a fortnight. Even if the Greeks don’t reject the euro outright, the chances of the country sticking with the austerity programme seem slim.
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Panic is often rational – but this time it’s gone too far
It’s a mess, in short. A whole range of conflicting interest groups are playing chicken with one another across Europe. The longer it goes on, the more chance there is of a nasty pile-up.
No wonder government bond yields in the US and the UK are near all-time lows as investors seek ‘safety’. Martin Wolf in the Financial Times concludes that “panic is rational”.
To be fair though, panic usually is. It’s the rational reaction to waking up to realise that a long-held belief (in this case, that Europe was a single financial entity) is entirely wrong. Indeed, the moment of panic is often just about the only rational aspect of the entire mania that gave rise to it.
However, panic can go too far. And that’s the big difference between this particular euro crisis and the others. Stocks in the eurozone are now cheap enough that anyone with a time horizon that stretches beyond their next set of quarterly performance figures should at least take a look at what’s out there.
As Albert Edwards points out in his latest missive from Société Générale, if you look at the CAPE (cyclically-adjusted price/earnings) ratio, then Europe is cheaper than it was in March 2009, the nadir of the financial crisis.
Panic might seem sensible, but “the macro backdrop always looks awful when the market is this cheap. There are no such things as toxic assets, only toxic prices.”
The fact is that almost regardless of what happens, chances are that if you buy the right European stocks today, you’ll not regret it over a five to ten-year horizon.
We take a look at some of the most attractive plays in the eurozone, and Italy in particular, in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, you can get your first three issues free here.
Meanwhile, if you have a very strong stomach for risk, all this volatility is producing some interesting opportunities for short-term traders and spread betters. Sign up for John C Burford’s free MoneyWeek Trader email to find out more about how you can take advantage. Do bear in mind that spread betting carries a very high level of risk – you can lose a lot more than your initial stake.
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