And then there were three. The European debt crisis took a step backward Monday after Portugal received an $11 billion bailout from finace ministers of the European union. This is the third bailout over the past year by the European Union in the infamous PIGS country appellation. With Portugal, Ireland and Greece having succumbed to poor fiscal policies, the only PIG remaining is Spain, and its future remains in doubt.
With Portugal taken care of, Greece returns to the top spot among Europe’s biggest worries. Pimco’s bond king Bill Gross, who runs the world’s largest bond fund, says Greece is the world’s No. 1 candidate for default.
And that problem has gotten even worse with the weekend arrest of Dominique Strauss-Kahn, the head of the International Monetary Fund.
Last week, I spoke with Dimitre Genov, the senior portfolio manager of the Artio Global Equity mutual Fund, about his view on Europe, Japan and the global economy.
Genov says while Germany, France and the Netherlands are strong, most of the continent is still weak and it’s obvious that Europe’s financial problems have not been solved. The European Central Bank is buying time as it tries to take more proactive measures to fight the debt crisis. Genov says that Greece still can’t compete and that it’s wages are too high. He says it’s inevitable that that Greece will need to restructure its debt. He expects this to lead to more downside in European stocks.
However, Genov doesn’t think Spain will go into default. “It’s more a liquidity problem,” say Genov. “They are making moves to liberalize the labor market. They need to get rid of the wage rigidity to become more competitive and more efficient.”
Many of the European governments need to deal with debt, he says, but they’re finding it very difficult because none of the politicians are willing to make hard choices. “The market has to force them to do it,” says Genov. And while he says there are definite bargain stocks to be found in Europe, many will end up being value traps as the entire continent faces years of deleveraging. Meanwhile, he thinks Japan is facing structural decline as well, and sees a lot of deleveraging.
Overall, he recommends investing in emerging markets despite their poor performance lately. “We still like China,” says Genov. “ The economy may be slowing down but 7% to 8% a year is still significant growth.” He says the multiples in Chinese assets have compressed. He suggest consumer stocks as food prices have rolled over and inflation should peak in the next quarter or two.
Still, he says the market is entering a seasonally weak period and metrics have started softening, so it’s quite possible the current pullback in the stock market could post a significant decline. “The U.S. won’t enter a recession this year, but expect a slowdown before more upside.”
Vanguard’s MSCI Europe ETF (VGK) holds stocks from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The expense ratio is just 0.14%.