By John Wasik
CHICAGO May 7 If this weekend's elections in
France and Greece do nothing else then they should remind
investors that these are individual countries, despite being
members of the euro zone. The 17 current countries in the
currency bloc might have thrown in their lot together in an
economic sense, but for investing purposes, you don't want to
treat the members - and surrounding countries that are waiting
to join - as a single entity.
I break up the continent into four distinct blocks that have
nothing to do with geography, but instead with economic risk
profile and political dynamics.
JUST LIKE US
I consider Portugal, Ireland, Italy, Greece and Spain to be
"Yankee" Europe. Although their fiscal problems are all slightly
different from each other, these countries all over-borrowed or
got nailed by a housing bubble, emulating American missteps.
Most have imposed devastating austerity measures that are
roiling their political systems and triggered double-digit
unemployment. Their short-term prognosis has been sour.
Investors have been selling shares of Yankee Europe of late.
Spain has led the list of losers with a 14.4 percent loss in the
iShares MSCI Spain Index Fund. Italy hasn't been hit as
hard, with a 0.36 percent loss in the iShares MSCI Italy Index
exchange-traded fund. All returns are year-to-date
through April 30, compiled by Lipper, a Thomson Reuters company.
The one exception in the Yankee group could be Ireland,
where there's a hint of a turnaround. The iShares MSCI Ireland
Capped Investable Index, rose 17.4 percent in the
period. Several Irish-based companies such as Elan, a
biotech firm, have growth prospects in global markets, so the
Emerald Isle is worth watching as a rebound candidate.
JUST SLIGHTLY BETTER
Middle Earth Europe - Belgium, the Czech Republic, Denmark,
the Netherlands, Portugal, Slovenia and the UK - includes some
countries that are in recession, but not in such dire straights.
Nearly all have felt the pinch. Will Greece be their bellwether?
Greeks repudiated the center-right's agenda in Sunday's
parliamentary elections, so it's not known if the country will
adhere to its previous bailout measures. Possibly more countries
Prudent Europe, on the other hand, is relatively stable and
didn't get embroiled in overleveraging to the extent that Yankee
Europe did. Led by Germany, which has insisted on austerity
measures for its sicker euro zone neighbors, these countries
include Finland, Norway, Sweden and Switzerland. They've not
only held their extensive social safety nets together, they
managed their economies fairly well and created strong export
Germany, not surprisingly, has led the pack, with a 17
percent return in the iShares MSCI Germany Index fund.
Other considerations include the Global X FTSE Norway 30 ETF
, up 14 percent; the iShares MSCI Sweden Index,
up 12.5 percent, or the iShares MSCI Switzerland Index,
up 9.2 percent. If you just wanted to stick with the
northern-most - and perhaps healthiest - members of this group,
then the Global X FTSE Nordic Region ETF would be a
worthy choice. It rose 15.3 percent.
ON THE WAY UP
The fourth region on my modified European map is the New
Kids from the Bloc - emerging markets that would include former
Soviet bloc countries like Poland, Bulgaria, Slovakia and
Romania. As many of the companies from these countries have
little history operating in a capitalist environment, they are
much less established than corporations based in Western Europe
and much higher risk for now. They're bundled in ETFs such as
the iShares Eastern Europe 10/40 USD fund.
None of these countries, though, can be viewed as insulated
from the general fiscal anxieties of the euro zone or the world
economy at large. A deepening recession in Europe or a
double-dip recession in the U.S. (unlikely at this point)
doesn't bode well, even for prudent Europe. In addition, China's
economic health impacts Europe, and since European politics are
often as complex as a Samuel Beckett play, last year's winners
may not hold up.
Yet with political tides turning against European
governments that imposed austerity, it's hard to tell how euro
zone countries will fare in the near future. Will they take hard
turns away from center-right agendas and start pushing growth
measures? Will the euro zone come apart? It's still too soon to
tell, but you can still find some decent companies if you're
willing to be patient and invest for the long term.