All is not lost amid the eurozone storm
By David Hall - Brewin Dolphin
- Issue 3
David Hall of investment management specialists Brewin Dolphin casts an eye of choppy waters
Given the market mayhem that has embraced stock markets since March, savers and investors would be forgiven for needing a stiff drink. And if they do, they should raise a glass to the far-flung corners of the world that are giving them hope.
Europe is still in crisis despite the narrow victory for the pro-austerity party, New Democracy in Greece’s second election. The marginal result has failed to eliminate the prospect of the debt-ridden nation leaving the euro, and although markets bounced when the election result was confirmed, the rally proved short-lived.
The continued uncertainty is sadly, not a surprise. After all, Greece is in its fifth year of recession and many economists believe that its austerity measures are driving its economy into a black hole. What’s more, it is not just Greece that has huge debt problems – the economies of Italy, Portugal and Spain are also in a desperate state. Spain recently went cap in hand to the International Monetary Fund. The euro also continues to come under pressure and recently fell to a three-and-a-half-year low against sterling.
Investors are understandably in a cautious mood; European investors are rushing to snap up ‘super-safe’ German government bonds that will pay a gross return of just 0.05 per cent. In other words, many investors are more concerned about the return of their money, rather than the return on their money, given that it is unlikely they will make a bean on these bonds once inflation and tax have been taken into account.
British consumers are, naturally, concerned too, with surveys showing that they are worried that the crisis will have a negative impact on their finances. There is certainly a good chance that many of their investments will have taken a hammering over the past three months as the euro crisis has intensified.
There is an adage that if you are going to panic, it’s best to panic early. Therefore, it might be too late to panic now, as selling investments at this juncture could simply crystallise losses. That said, if you can’t remember the last time you reviewed your investments now could be the time to do so.
But it is not the time for knee-jerk reactions. Now is the time to draw comfort from the positives and focus on the long-term goals.
For starters, growth continues to come from outside the UK and the eurozone – notably Asia and other emerging economies. You may not be aware that many British companies that your ISA or your company pension invests in, generate a significant amount of their earnings from outside the UK.
Vodafone, for instance, generates around four fifths of its earnings from outside the UK. GlaxoSmithKline, another FTSE giant, has shifted its focus from the Western world to the developing one, selling toothbrushes, vaccines and sports drinks to India, China and Brazil.
Earlier this month, distiller Diageo, announced that sales of whisky in Europe had dropped by more than 1 per cent, but this masks the fact that sales boomed 14 per cent in the emerging world.
Many British companies are also paying yields of more than 5 per cent. A decent yield is not to be sniffed at a time when the Bank of England base rate continues to languish at a paltry 0.5 per cent. Shares that offer these attractive yields include household names such as Tesco, Sainsbury’s and HSBC.
The other fillip could be America, where it is widely anticipated that the Federal Reserve is willing to pump money into the US financial system to help keep its economy moving. The world’s largest economy is not out of the woods yet, but it has been showing signs of a sustained recovery and this will provide much-needed support to the global economy.
With much riding on overseas powerhouses such as America, it is worth noting that former US President John F Kennedy once said: “The one unchangeable certainty is that nothing is certain or unchangeable.” It is a statement that sums up the euro crisis today – and it serves to remind savers why they should be prepared for every eventuality.
Disclaimer: The opinions expressed in this document do not necessarily represent the views held throughout Brewin Dolphin Ltd. The value of your investment can fall and you may get back less than you invested. Any investment mentioned is for illustrative purposes only and is not intended as investment advice.