I truly believe it pays to be an optimist in life. it’s practically part of the job description. You can fearfully view a crisis as a time of loss and peril, or you can choose to view it as a time of opportunity with potential for positive change. The Eurozone crisis has triggered a ripple effect across global markets, and many investors are expressing pessimism about the economic health and sustainability of the region. Me? I’m an optimist. The output of Greece and the increasing intensity of financial shock waves radiated from Europe are approaching, and there is much we can do about it. The best advice that is not really very useful, and is closing the hatches, because we have rough seas ahead.
In my view, the European authorities are on the right track despite the political gridlock between pro-austerity countries (such as Germany) and those railing against it (such as Greece). The most important aspect of this situation, in my view, is that the European leaders are trying their best to put together a fiscal pact to strengthen their alliance and their currency. This will take time and requires patience, but in the end, I believe it will yield some positive results. The problems that led to the debt crisis must be addressed—and they are now.
It is clear that Europe has many problems. The continent is experiencing a debt crisis, a banking crisis, a crisis of competitiveness and a political crisis. But some of these problems have been unnecessarily aggravated by the lack of flexibility of the European Central Bank. The ECB has been slow to cut interest. Interest rate cuts implemented by the ECB would make it easier to pay the burden of national debt – especially if the interest rate cuts are accompanied by quantitative easing, the ECB buying bonds on the secondary market.
Crisis Can Create Bargains
Europe is experiencing economic turmoil, but I think it’s important to not abandon Europe, and instead to think about actually looking there for potential investment bargains brought on by the crisis. At the same time, I think it’s important for all investors to diversify globally. Of course, I’m particularly interested in emerging markets, since emerging markets now represent about a third of the world’s stock market capitalizations. Given good growth projections in many emerging countries, along with their youthful populations and generally better debt-to-GDP ratios than many developed markets, I firmly believe these markets shouldn’t be ignored as a global diversification option. The worries and uncertainly will likely continue to create some angst in the global market, which could spill over into emerging markets, but as noted earlier, I view uncertainty as opportunity. We may even see some emerging market brands shopping for assets in Europe at bargain prices and growing their global presence.
Some investors seem to feel emerging markets are too “risky” for their tastes, but the experience of the Eurozone crisis provides a strong example of the fact that no investment is without risk. A European banker recently asked me about corporate governance in emerging markets, implying that he thought it was very poor. My response was that poor corporate governance can be found not only in emerging markets, but also in Europe and the U.S. The audience gasped. I explained that while the issues may be unique to each market, corporate governance can be good or bad anywhere in the world. For example, there are U.S. companies where the founders can make billion-dollar decisions without consulting any board of directors. Corporate governance is something we always need to be vigilant about in our company-by-company quest for investment opportunities.
That all said, I’m not too worried about Europe’s long-term future, despite today’s uncertainty. Of course, if Europe and the U.S. move into recession, it’s likely to have a ripple effect on all markets. I don’t think that’s likely to happen though. One key thing I’m watching is currency values. From my perspective, the Euro has been holding up relatively well throughout the crisis; so far, it hasn’t plunged dramatically and has held above its debut price back in 1999. That means someone has confidence in the Eurozone’s potential, and I do, too!