May 7, 2012
If this weekend's elections in France and Greece do nothing else then they should remind investors that these are individual countries, despite being members of the euro zone. The 17 current countries in the currency bloc might have thrown in their lot together in an economic sense, but for investing purposes, you don't want to treat the members - and surrounding countries that are waiting to join - as a single entity.
I break up the continent into four distinct blocks that have nothing to do with geography, but instead with economic risk profile and political dynamics.
JUST LIKE US
AI consider Portugal, Ireland, Italy, Greece and Spain to be "Yankee" Europe. Although their fiscal problems are all slightly different from each other, these countries all over-borrowed or got nailed by a housing bubble, emulating American missteps. Most have imposed devastating austerity measures that are roiling their political systems and triggered double-digit unemployment. Their short-term prognosis has been sour.
Investors have been selling shares of Yankee Europe of late. Spain has led the list of losers with a 14.4 percent loss in the iShares MSCI Spain Index Fund. Italy hasn't been hit as hard, with a 0.36 percent loss in the iShares MSCI Italy Index exchange-traded fund. All returns are year-to-date through April 30, compiled by Lipper, a Thomson Reuters company.
The one exception in the Yankee group could be Ireland, where there's a hint of a turnaround. The iShares MSCI Ireland Capped Investable Index, rose 17.4 percent in the period. Several Irish-based companies such as Elan, a biotech firm, have growth prospects in global markets, so the Emerald Isle is worth watching as a rebound candidate.
JUST SLIGHTLY BETTER
Middle Earth Europe - Belgium, the Czech Republic, Denmark, the Netherlands, Portugal, Slovenia and the UK - includes some countries that are in recession, but not in such dire straits. Nearly all have felt the pinch. Will Greece be their bellwether? Greeks repudiated the center-right's agenda in Sunday's parliamentary elections, so it's not known if the country will adhere to its previous bailout measures. Possibly more countries will follow.
Prudent Europe, on the other hand, is relatively stable and didn't get embroiled in overleveraging to the extent that Yankee Europe did. Led by Germany, which has insisted on austerity measures for its sicker euro zone neighbors, these countries include Finland, Norway, Sweden and Switzerland. They've not only held their extensive social safety nets together, they managed their economies fairly well and created strong export businesses.
Germany, not surprisingly, has led the pack, with a 17 percent return in the iShares MSCI Germany Index fund. Other considerations include the Global X FTSE Norway 30 ETF, up 14 percent; the iShares MSCI Sweden Index, up 12.5 percent, or the iShares MSCI Switzerland Index, up 9.2 percent. If you just wanted to stick with the northern-most - and perhaps healthiest - members of this group, then the Global X FTSE Nordic Region ETF would be a worthy choice. It rose 15.3 percent.
ON THE WAY UP
The fourth region on my modified European map is the New Kids from the Bloc - emerging markets that would include former Soviet bloc countries like Poland, Bulgaria, Slovakia and Romania. As many of the companies from these countries have little history operating in a capitalist environment, they are much less established than corporations based in Western Europe and much higher risk for now. They're bundled in ETFs such as the iShares Eastern Europe 10/40 USD fund.
None of these countries, though, can be viewed as insulated from the general fiscal anxieties of the euro zone or the world economy at large. A deepening recession in Europe or a double-dip recession in the U.S. (unlikely at this point) doesn't bode well, even for prudent Europe. In addition, China's economic health impacts Europe, and since European politics are often as complex as a Samuel Beckett play, last year's winners may not hold up.
Yet with political tides turning against European governments that imposed austerity, it's hard to tell how euro zone countries will fare in the near future. Will they take hard turns away from center-right agendas and start pushing growth measures? Will the euro zone come apart? It's still too soon to tell, but you can still find some decent companies if you're willing to be patient and invest for the long term.