“You can lead a man to Congress, but you can’t make him think.” — Milton Berle
If you are either an investor or trader looking for a good place to put a bet down for 2013, you may not need to look much further than the eurozone.
The first question you may ask is: But in which direction?
In spite of the fact that a number of prominent investors lost large sums of money betting against the euro, the underlying issues resting at the heart of those bets remain the same. Those issues are tied in to the sovereign debt crisis, which hasn’t been dealt with in any meaningful way in Greece, Italy, Spain, or Portugal. The related issues, such as the region’s banking liquidity issues, have actually been more successfully dealt with, at least in the short term. But the structural problems that are derived from a monetary union that lacks fiscal unity have not been fundamentally changed.
It is undeniable that the markets have acted like some kind of solution to Europe’s debt crisis has been reached. However, the action that had the greatest impact on a shift in investor perception regarding the eurozone came from a statement, not any policy change or treaty adjustments. That statement was made last summer by the European Central Bank’s (ECB) Mario Draghi, who announced, not without a certain degree of audacity, that the ECB would do “whatever it takes” to keep the euro intact.
The market reacted in similar fashion to how it tended to act following similar positive pronouncements made by other eurozone leaders, which was that equities trended sharply higher and Italian and Spanish bond yields began to fall. What was different this time around was that, instead of falling back down to earth, prices on both the European bourses and Wall Street continued to trend upward for a good deal of 2013, though of course multiple factors added to that effect.
A look at the European Union (EU) in general, and the eurozone in particular, reveals a large segment of the region mired in recession, with forecasts by both the EU and the International Monetary Fund (IMF) indicating expectations of continuing levels of stagnant growth at best, and negative growth at worst, for a large part of 2013.
With unemployment levels reaching close to 12% on average across the eurozone, it is hard to see how growth will increase in any meaningful way within the relatively short time span of a single year.
Stimulus efforts will likely be stymied by Germany’s fear of inflation, and austerity measures currently in place in the region’s southern countries seem likely to shake up the current political regimes in Greece, Spain, and Italy. National elections playing out in 2013, including those for Germany’s Angela Merkel, pose the risk of fracturing a monetary union that, while showing enough resilience to fool short-sellers of the eurozone economy in 2012, may fall to a combination of events that positive ECB statements simply won’t be able to contain.
What the Periscope Sees
Here is a list of some of the top performing European ETFs for 2012. The double-digit gains seen for the past year could be quickly lost in the event that investors decide that the eurozone is again on shaky ground.
Therefore, the list, which indicates gains year-to-date, could be viewed as a short list, one that provides ample opportunity for those who may be looking for a downside portfolio hedge, or perhaps even a down-market directional play.
VGK — MSCI European ETF, +15.6%
EWG — iShares MSCI Germany Index, +26.2%
EZU — iShares MSCI EMU Index Fund, +17.2%
FEZ — SPDR DJ Euro STOXX 50 ETF, +14.7%
EWL — iShares MSCI Switzerland Index Fund, +17.2%
As an alternative to shorting the ETFs themselves, which is not always an option for investors, consider buying put options as a way to play these ETFs to the downside.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.