Europe's Suicidal Tendencies

06/10/2010 1:54 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Stock markets in the European Monetary Union are down 12% over the last three months, but the cumulative toll has been far worse when you factor in the euro's forced march south.

Since the beginning of the year, Spanish equities have depreciated 40% in dollar terms. France has cost greenback-counting investors more than 25%, and oil-rich, euro-shunning Norway has proven no safer.

There's no mystery to Europe's woes: Its inflexible economies were already lagging the global recovery when bond investors forced politicians into drastic growth-sapping budget cuts, with general encouragement from central bankers.

The ranks of hairshirted penitents grow daily: the United Kingdom is merely the most recent convert to the German way of seeing things. 

But if Europe's hobgoblins are well known, it may be past time to ask what ails Asia. Australia, New Zealand, Hong Kong, and Singapore have combined to lose 15% this year in dollar terms. India has grown more than 3% cheaper this month alone for those with surplus US currency.

Everyone has their own reasons to feel blue: the harp drop in Australian consumer confidence, for example, is being blamed in part on a proposed tax on mining profits. Hong Kong remains hostage to the hot money pouring in from China, which is pushing property prices ever higher.

Europe can only hope for such problems. It seems too hobbled by a painful rift at its core to address its most pressing woe, which is not the budget shortfalls but the lack of growth.

Confidence is shattered so badly that the markets sank last week when Hungarian politicians said their fiscal problems were worse than the prior government let on. The rhetoric, which had largely been intended for domestic consumption, was quickly toned down. But Budapest stocks, which were nursing a small lead on the year beforehand, quickly tanked. Austrian equities are down 9% in a week as fears of Hungarian defaults haunt Viennese banks.

UK observer Chris Gilchrist says in a new Q&A that the dawdling and brinksmanship are par for the European course, and that the governments will eventually have to back the banks with whatever caveats are required to appease the Germans.

But the political will may be lacking as Berlin and Paris part ways, after 60 years of sublimating their rivalry in the joint drive to unite Europe. For the French, that dream lives on as a necessary counterweight to American or Asian hegemony. The Germans, meanwhile, are tired of writing bailout checks so that France can strut across the global stage.

Ahead of gold's recent move to record highs, the Coffin brothers wrote of bullion's rising appeal as an alternative currency and safe haven from Europe's crisis. Carla Pasternak argued that Brazil's top telecom has been unjustly sold off given its strong prospects and ample cash flow. Tom Slee highlighted two Canadian stocks with the werewithal to weather many rainy days. 

Canada has been one of the world's strongest developed markets this year, its small loss trailing only Denmark and Sweden, which are still in the black. Outside of these, investors who have strayed furthest from the beaten track have fared best. Bangladeshi stocks are up 28% in 2010, Kenya's 24%, Nigeria's 17%. This is hardly a sign of global strength. Shanghai, a better gauge of the appetite for risk, continues to wallow below break even for the year. The bulls need China to do better.

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