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We stick to our Recommendation of Euro Denominated Assets for 2013

November 27, 2012

In a piece towards the end of last year (, we had recommended selectively chosen Euro denominated assets as the best investment opportunities for 2012.  In that piece, we had listed the criteria for the assets.  So far in 2012, Euro denominated assets have turned out to be one of the best investments.  The German stock index is up 20%.

For 2013 too we believe carefully chosen Euro denominated assets are the best available from a risk-reward perspective.  But in 2013, corporate earnings in the Euro zone will collapse.  When earnings pick up the following year, they will be real earnings- not the by-product of a credit bubble. So, this is not the investment strategy for the short-term investor but for one who has a 3-5 year horizon.

We feel more comfortable with this recommendation this year than the last because the Europeans are going thru the much-needed austerity engineered by Germany without bitching beyond a point.  In the late 1990s, when West Germany whipped East Germany into shape, there were many who called Germany the sick man of Europe because of the low growth under the clean up programme.  But when an economy is being whipped into shape, things seem bad as growth collapses.  But the darkest hour precedes the dawn.   How different this is from the rest of the world which have not even taken the baby steps needed to clean up the mess in their economies.  In a few years, we see ultra competitive companies emerging from the corners of the Eurozone.

We would change our belief only if the ECB sanctioned bond buying program carries on, without reform happening in the indebted countries.  Also, we would change our mind if France refuses to tread the path being taken by countries such as Spain and Italy.  France is the weak underbelly of the Eurozone, not Greece.

Just as last year, we continue to hold the view that an Euro asset investment entails taking equity risk and not credit risk.  This includes investing in Euro denominated fixed income assets.


From → Credit Analysis

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