I truly believe it pays to be an optimist in life. As a long-term investor, it’s practically part of the job description. You can fearfully view a crisis as a time of loss and peril, or you can choose to view it as a time of opportunity with potential for positive change. The Eurozone crisis has triggered a ripple effect across global markets, and many investors are expressing pessimism about the economic health and sustainability of the region. Me? I’m an optimist. With elections in Greece now behind us, there are still many unanswered questions. But when all is said and done, I believe Europe should emerge stronger, regardless of whether or not Greece chooses to leave the Euro (which I think is unlikely).
In my view, the European authorities are on the right track despite the political gridlock between pro-austerity countries (such as Germany) and those railing against it (such as Greece). The most important aspect of this situation, in my view, is that the European leaders are trying their best to put together a fiscal pact to strengthen their alliance and their currency. This will take time and requires patience, but in the end, I believe it will yield some positive results. The problems that led to the debt crisis must be addressed—and they are now.
It seems that Greece’s first election in May resulted in a strong protest of the electorate against the traditional political parties with the victory of radical left and right parties, many of whom denounced the European Union (EU) debt repayment terms and fiscal reform program. In the second June 17 election, it seemed like the anger had subsided and a more logical approach was accepted; the established moderate parties favoring acceptance of the EU terms for reforms won the majority.
There’s been a big debate about whether Greece will stay or leave the Euro, and we still don’t have a definitive answer. I think Greece can stay and reform its economy to potentially steer it toward a brighter future, but only if its leaders put a stop to government waste and eliminate barriers to business growth. Ironically, a reduction in government spending leading to a reduction in government bureaucracy and regulations can potentially translate into higher growth and prosperity for Greece. However, if for some reason the EU forces Greece to leave the Euro or the Greek government ultimately decides that it will leave and print its own currency, I think the Greek people would generally still hold Euros and therefore would not be likely to entirely leave the single-currency system.
I believe Greece isn’t the only country that could stand to learn a thing or two from the lessons this crisis is teaching. Some Western European countries and other developed markets across the globe are struggling with over-leveraged balance sheets and are seeking solutions. Meanwhile, many emerging markets are in better shape than some developed countries in terms of both debt and growth. In Eastern Europe for example, Poland was the only EU member to avoid recession during the 2008-2009 financial crisis.1
While Western Europe is still much larger than Eastern Europe, I think Eastern Europe has the potential advantage of starting from a low economic base, and therefore could see stronger growth trends and reform efforts. The necessary austerity will undoubtedly be painful for some European countries, but it would force the weaker players in the region to get their acts together. Both Eastern and Western European countries have great potential to cooperate and achieve a better economic outcome for all. The West can invest in the East and the East can supply the West with lower-cost goods and opportunities for investment, as well as expanded markets.
Crisis Can Create Bargains
Europe is experiencing economic turmoil, but I think it’s important to not abandon Europe, and instead to think about actually looking there for potential investment bargains brought on by the crisis. At the same time, I think it’s important for all investors to diversify globally. Of course, I’m particularly interested in emerging markets, since emerging markets now represent about a third of the world’s stock market capitalizations. Given good growth projections in many emerging countries, along with their youthful populations and generally better debt-to-GDP ratios than many developed markets, I firmly believe these markets shouldn’t be ignored as a global diversification option. The worries and uncertainly will likely continue to create some angst in the global market, which could spill over into emerging markets, but as noted earlier, I view uncertainty as opportunity. We may even see some emerging market brands shopping for assets in Europe at bargain prices and growing their global presence.
Some investors seem to feel emerging markets are too “risky” for their tastes, but the experience of the Eurozone crisis provides a strong example of the fact that no investment is without risk. A European banker recently asked me about corporate governance in emerging markets, implying that he thought it was very poor. My response was that poor corporate governance can be found not only in emerging markets, but also in Europe and the U.S. The audience gasped. I explained that while the issues may be unique to each market, corporate governance can be good or bad anywhere in the world. For example, there are U.S. companies where the founders can make billion-dollar decisions without consulting any board of directors. Corporate governance is something we always need to be vigilant about in our company-by-company quest for investment opportunities.
That all said, I’m not too worried about Europe’s long-term future, despite today’s uncertainty. Of course, if Europe and the U.S. move into recession, it’s likely to have a ripple effect on all markets. I don’t think that’s likely to happen though. One key thing I’m watching is currency values. From my perspective, the Euro has been holding up relatively well throughout the crisis; so far, it hasn’t plunged dramatically and has held above its debut price back in 1999.2 That means someone has confidence in the Eurozone’s potential, and I do, too!
1.Source: CIA World FactBook, May 2012.
2. Source: European Central Bank. Euro closing price on January 4, 1999, was $1.1789.