How to guard investment during a Europe crisis
October 27, 2011, Thursday
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Print Edition
Print Edition
EUROPEAN debt continues to cause fears of a systemic banking crisis, particularly in Europe. This has caused some pretty wild swings in the markets on fears it will lead to a double-dip recession. What can you do to protect your investments?
First, stay calm. Despite what you might read, the world will not end. It might get messy, but as the saying goes, "this too shall pass." So if you notice the market has fallen significantly before you pay attention, it is probably better to wait it out than to panic-sell at the bottom of the market.
To plan, it pays to understand what a crisis normally does. In times of crisis, such as 2008, emerging market equities fall heavily, "risk" currencies such as the Australian dollar, Brazilian real, Indian rupee and others, also decline rapidly. Shares in general decline and corporate bonds, particularly high-yield bonds, fall. Everyone runs to US treasuries despite the growing debt burden. Gold is no savior, falling 30 percent in 2008 for example, since it is vulnerable to margin calls for the significant number of investors who buy on margin with broker-loaned debt.
Do not listen to gold bugs - it is not the ultimate safe haven. It is a speculative investment, sometimes a good one, but with minimal industrial use.
Diversified
Does that mean I should just sell everything and hide in a cave with my US Treasury certificates? A crisis might not happen, so no - reducing weights, particularly financials and European shares - is probably enough.
A well-diversified dividend portfolio is a good protection, as are non-correlated investments. Dividend-paying stocks - such as Johnson & Johnson - in healthcare, retail or telecommunications providers are also often good hedges. There are not many yet but further falls will provide opportunities. Also solid commercial or retail property sold on an attractive yield of greater than 5 percent are a good income and inflation hedge.
Here in China we have some great ways to diversify. The yuan is slowly but surely appreciating against the US dollar, so that is a good hedge. The Chinese A-share market has fallen to close to a two-year low and valuations are pretty good at around 12 times earnings and 1.2 times book value.
The market here marches to a government policy tune, not a global beat. For example, the last time the Chinese market bottomed in November 2008 was a good four months before the March 2009 bottom of other markets. Could it do it again? Could we be near the bottom? Watch for signs of government monetary easing.
A liquidity crisis caused by Europe will be similar to 2008 since some assets will be sold at fire-sale prices, particularly by smaller private exporters, say from Zhejiang or Jiangsu, whose business might be stretched by liquidity problems.
Last time around, European importers, like most businesses, delayed payments where possible and there were cheaper apartments available.
The longer-term consequences of a crisis in Europe cannot be ignored. If the longer-term solution is to inflate away debts, then real assets, such as property and commodities with a dash of equities, is preferred. If a true crisis occurs, then the US dollar, Treasuries and the yuan are preferred. If Japan-like stagnation occurs, then corporate bonds and high-yielding large companies are preferred.
So keep watching the markets with a calm head, a well-diversified portfolio, a little less Europe and a healthy dash of cash, and you should be sitting comfortably waiting for the fall.
Owen Caterer
The founding partner of CatererGoodman Partners, a Shanghai-based financial consultancy. Caterer is a member of the Financial Services Institute of Australasia and recognized as a Fellow of Finance. He has been providing financial advice for almost 10 years and first lived in China in 1997.
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