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Euro crisis may lead to great opportunities for investment
By Didier Cossin |
March 8, 2012, Thursday
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Print Edition
Print Edition
TODAY, many central banks and corporations are preparing for a break-up, or at the very least a transformation of the euro. Indeed, some euro-based central banks are already checking their ability to print non-euro currencies. Ireland, for instance, has acknowledged that it is doing this and many are assessing Greece's capability to do so as well.
The euro crisis threatens the economic health of Europe in unprecedented ways and is one of the great risks facing the world today. And yet, all great risks lead to great opportunities.
Successful investments will thus rely on three steps to master risks: pre-investment analysis or due diligence, investment structuring and pricing, and post-investment management. Successful investments are thus sophisticated investments, as many have learned in tough times.
China, standing at the front row of overseas investments, is certainly developing its own scientific investment methods. Whether or not it will be as successful as possible will depend not on luck, but on sophistication.
Vastly diverse
Europe is vastly diverse and includes some of the most secure countries in the world - Norway, Switzerland - as well as some of the riskiest economically - Greece, Ireland, Portugal.
The investments in Europe therefore range from some of the safest in the world to some of the riskiest. There is a strong behavioral bias to risk perception, and Europe's presence in the media spotlight elevates it to the forefront of investor concerns. This inadvertently leads to a herd mentality that confuses the overall European environment.
Ultra-safe investments may not be considered as such, while some risky environments, for example in countries implicitly or explicitly pegged to the euro, may not be perceived accurately. A strong independent risk analysis is the first step to ensuring good investments.
While much attention is being paid to the euro and its role in the crisis, risk identification should go much further than the currency or the general economy level; the euro crisis may threaten product demand, work continuity from suppliers, specific commodity prices, employment stability and social peace.
Disruption in logistics can threaten an investment at least as much as the currency or the economic environment. A thorough identification of the risks concerned is essential to strong investments.
There are three potential scenarios to the euro break-up. The first and most probable scenario consists of peripheral countries, such as Greece, Ireland and Portugal, leaving the eurozone because of the fiscal discipline required to remain a member. This would actually lead to a strengthening of the euro in the long term, as the countries leaving the euro would be the weaker ones.
Stronger discipline
Indeed, the requirement for stronger fiscal discipline and the supervision of the IMF for some countries has reinforced the view that a stronger Europe could emerge from the crisis. Part of the risk assessment then is to analyze countries that might potentially leave the euro: Italy? Spain?
The second scenario consists of strong countries leaving the euro. A disagreement between France and Germany, or simply the lack of consensus building behind the stronger economies could lead to this lower probability scenario. The euro would then come out weaker in both the short and long term, and the European economic impact would be important in the mid to long term.
The third potential scenario would be the general break-up of the eurozone and then perhaps the emergence of some regional currency associations.
In all three scenarios, checking the investment cash-flow safety, the risk exposures, and which exposures can be hedged, are part of the management techniques necessary to develop.
Many corporations are already committed to this work, including dollar-denominated ones, and are analyzing risk levels before and after risk management implementation.
A natural follow-up to the risk analysis takes us to the second step: the pricing and structuring of the investments. No investment is a good investment when it is at the wrong price. Pricing is thus essential to investment success and is often a signal of how disciplined the bidder is, itself a strong indicator of the quality of the investment strategy.
Sophisticated pricing will include both financial techniques, including methods such as option pricing or statistical analysis, as well as behavioral techniques, checking the confidence or optimistic bias of the bidder.
Last but not least, investment management is essential to management success. This is an essential step. Most acquisitions fail not because the deal did not make sense, but because it was poorly managed, or sometimes poorly integrated.
Didier Cossin is professor of finance and governance at IMD, director of the IMD Global Board Center and program director for High Performance Boards.
The euro crisis threatens the economic health of Europe in unprecedented ways and is one of the great risks facing the world today. And yet, all great risks lead to great opportunities.
Successful investments will thus rely on three steps to master risks: pre-investment analysis or due diligence, investment structuring and pricing, and post-investment management. Successful investments are thus sophisticated investments, as many have learned in tough times.
China, standing at the front row of overseas investments, is certainly developing its own scientific investment methods. Whether or not it will be as successful as possible will depend not on luck, but on sophistication.
Vastly diverse
Europe is vastly diverse and includes some of the most secure countries in the world - Norway, Switzerland - as well as some of the riskiest economically - Greece, Ireland, Portugal.
The investments in Europe therefore range from some of the safest in the world to some of the riskiest. There is a strong behavioral bias to risk perception, and Europe's presence in the media spotlight elevates it to the forefront of investor concerns. This inadvertently leads to a herd mentality that confuses the overall European environment.
Ultra-safe investments may not be considered as such, while some risky environments, for example in countries implicitly or explicitly pegged to the euro, may not be perceived accurately. A strong independent risk analysis is the first step to ensuring good investments.
While much attention is being paid to the euro and its role in the crisis, risk identification should go much further than the currency or the general economy level; the euro crisis may threaten product demand, work continuity from suppliers, specific commodity prices, employment stability and social peace.
Disruption in logistics can threaten an investment at least as much as the currency or the economic environment. A thorough identification of the risks concerned is essential to strong investments.
There are three potential scenarios to the euro break-up. The first and most probable scenario consists of peripheral countries, such as Greece, Ireland and Portugal, leaving the eurozone because of the fiscal discipline required to remain a member. This would actually lead to a strengthening of the euro in the long term, as the countries leaving the euro would be the weaker ones.
Stronger discipline
Indeed, the requirement for stronger fiscal discipline and the supervision of the IMF for some countries has reinforced the view that a stronger Europe could emerge from the crisis. Part of the risk assessment then is to analyze countries that might potentially leave the euro: Italy? Spain?
The second scenario consists of strong countries leaving the euro. A disagreement between France and Germany, or simply the lack of consensus building behind the stronger economies could lead to this lower probability scenario. The euro would then come out weaker in both the short and long term, and the European economic impact would be important in the mid to long term.
The third potential scenario would be the general break-up of the eurozone and then perhaps the emergence of some regional currency associations.
In all three scenarios, checking the investment cash-flow safety, the risk exposures, and which exposures can be hedged, are part of the management techniques necessary to develop.
Many corporations are already committed to this work, including dollar-denominated ones, and are analyzing risk levels before and after risk management implementation.
A natural follow-up to the risk analysis takes us to the second step: the pricing and structuring of the investments. No investment is a good investment when it is at the wrong price. Pricing is thus essential to investment success and is often a signal of how disciplined the bidder is, itself a strong indicator of the quality of the investment strategy.
Sophisticated pricing will include both financial techniques, including methods such as option pricing or statistical analysis, as well as behavioral techniques, checking the confidence or optimistic bias of the bidder.
Last but not least, investment management is essential to management success. This is an essential step. Most acquisitions fail not because the deal did not make sense, but because it was poorly managed, or sometimes poorly integrated.
Didier Cossin is professor of finance and governance at IMD, director of the IMD Global Board Center and program director for High Performance Boards.
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