Monday, 30 July 2012

Investing amid Crisis

As the crisis lingers on, unemployment, at 11.1% in Europe, U.S. investors  moving assets from the euro zone by selling $4.1 billion more securities than they bought since 2011 - causing a flight from euros to US bonds, while Draghi reinsures that anything will be done to save the union, should you consider Europe as an investment in your portfolio?

Well let’s revisit basic Economics…

Flight to safety has caused yields to drop in some cases to negative levels- low interest rates -> lack of lending/investment -> depreciated currency -> increase in trade surplus -> increase in exports → investment in exporting companies.

Exporting companies in Europe should not be ignored, as they are less dependent on European consumers who are at the moment pulling back on any forms of consumption.  A country that takes the spotlight is Germany and its competitive technology driven export economy. As the stocks are trading at deep discounts, now is the time to look at established exporting companies.

Germany is contributing 8.7 billion euros this year to the European rescue fund, quite a hefty amount for a nation whose anti-bailout voters are criticizing Merkel’s decisions.  However, what’s even heftier is the amount of exports Germany has gained amid the crisis  - 100 billion euros!

Trade surplus has increased by 4% of GDP due to the lower currency.  This increased competitiveness is also due to the fact that Germany’s exports are shipped outside the European union unlike countries like France and Spain.

If youre not familiar with specific stocks in the German market, the easiest way to achieve exposure is through an ETF.  We recommend iShares MSCI Germany Small Cap Index Fund.  Although the ETF is comprised of small cap stock, its sector weighting is 30 % in industrials and 14% in technology stock – both competitive in Germanys export market. 

Anna Nepravishta


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