What Europe’s Indebted Economy Really Means for Your Portfolio

Debt and Bailouts and Riots, oh my! In the U.S., we’ve been transfixed on what’s going on with Europe’s debt crisis, the so-called “contagion” ready to spread like wildfire in the largest economic area in the world. But things aren’t always what they appear to be…

With all investors’ eyes on Europe for the last month, I thought it would be a good idea to fill you in on how the Eurozone debt crisis is affecting stocks across the pond, and how it could continue to affect U.S. stock for quite some time. More importantly, we’ll look at the investment remedies to protect your cash…

I’ve been away from Agora Financial’s office in Baltimore for the past two weeks, in Europe of all places – getting a first-hand view of what exactly is going on over here in the aftermath of Greece’s debt debacle. I’m sorry to disappoint, but things aren’t crumbling to pieces over here – in fact, Europe could end up the victor when the smoke clears.

The issue of unsustainable economies in Europe is a very big problem, but by piling less productive economies (like the PIIGS countries) onto the backs of highly productive nations like Germany and France, you’re essentially left with a win-win situation for the countries who’ve gotten themselves into trouble. Simply put, the powerhouses need to bail out the PIIGS if they want to keep their shares economy in equilibrium – as we saw with Greece.

But the falling Euro doesn’t really hurt Europe as much as we might think. In a country like the U.S., where we have halted most of our production in favor of imports, the falling dollar is a real problem. But in Europe, where protectionist policies have kept the factors of production alive despite the relative costs over cheap imports, the falling Euro really only makes the continent’s exports more attractive to outsiders like the U.S.

And for Euro-denominated companies, the falling Euro is an even better thing – because it has a nil effect on their financials, while creating short-term currency gains for their international operations.

In short, Europe’s not really suffering that much (despite the French train strike over austerity measures that left me stuck in Paris last week). The productive nations in the EU still compose the majority of the Union’s GDP – which means that bailouts will continue to be a major, but manageable necessity as sovereign debt comes due.

As we’ve already seen back home in the states, Europe’s debt issues have had a meaningful impact on our own economy – and they should. With scores of multinational corporations domiciled in the U.S. of A, all of those formerly fruitful European operations are essentially taking 20% decline year-to-date just because the Euro has tumbled. I’m talking about the stalwart recession-resistant plays like McDonald’s (NYSE: MCD) and Ford (NYSE: F).

Essentially, as long as things continue to be shaky in the Eurozone, American blue chips will continue to take hits…

So, what can you do to limit the risks to your portfolio?

For starters, look at small-cap stocks. As we’re fond of saying here at the Penny Sleuth, the right small-caps have some of the best potential to increase in value during tough times because they’re small enough to still have growing room when the economy isn’t growing. But for right now, the beauty of small-caps is the fact that few of them have the exposure to Europe that’s causing issues with the biggest names on the trading floor.

Still, small-caps are greatly impacted by the broad market here in the U.S. – so when the S&P 500 falls, so too do the tiny stocks. To diminish those affects, take a look at foreign names that aren’t impacted by the Eurozone.

Brazil is one of my favorite countries from an economic perspective; with a burgeoning middle class, energy independence, and a still-growing manufacturing base, Brazilian small-caps offer an especially growth oriented opportunity right now. To get a taste of the market, check out the Market Vectors Brazil Small-Cap ETF (NYSE: BRF).

For exposure to small-cap stocks based here in the U.S. that are tied to a hard asset like gold, the Junior Gold Miners ETF (NYSE: GDXJ) offers an easy way to buy into small exploration and mining stocks with professional management. And for small-cap income action tied to the U.S. dollar, check out the WisdomTree Small-Cap Dividend ETF (NYSE: DES) – it provides a steady stream of dividend income, which isn’t as prone to the market’s whipshaws.

Any of the three ETF flavors I just mentioned could help you protect your portfolio right now – I’ll keep you filled in on the Europe situation as it progresses. For now, it’s back to Baltimore…

Cheers,
Jonas Elmerraji
Managing Editor, Penny Sleuth

June 3, 2010

What Europe’s Indebted Economy Really Means for Your Portfolio was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

Read the original story at Penny Sleuth :: Jonas Elmerraji