Mixed Signals out of Europe

09/23/2010 1:10 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

The European debt crisis “has passed,” Spanish prime minister Jose Luis Rodriguez Zapatero claimed in New York this week, as he tried to drum up interest in his country’s bonds and reforms.

He might even be right for the moment—at least for Spain. Alone among the European stragglers derided as the PIGS, Spain has seen its borrowing costs drop sharply from the summer highs. (No such luck for Greece, Ireland, or Portugal, though.)

And though Zapatero remains deeply unpopular at home, his countrymen seem even less enthusiastic about the nationwide strike called by the unions to protest his government’s policies.

To make the broader case that Europe’s in the clear, one would have to have to start with stock markets that hit multi-month highs this week. Then there’s the oft-maligned euro, which is at its high against the dollar since April and is up 13% from its June low. (And this isn’t just about a weaker greenback; the euro is at the year’s best levels against the Swiss franc.)

Finally, Greece, Ireland, and Portugal successfully sold bonds this week, albeit at higher rates than in the recent past.

On the other hand, you don’t need to be a Nouriel Roubini to see that the fiscal austerity imposed on Europe by Germany isn’t working out so well. Portugal is having trouble shrinking its deficit in the face of economic stagnation and higher borrowing costs. Ireland is in the same leaky boat, only it’s also wrestling with a massive bailout tab for its overextended banks. Even the UK is struggling to deliver on its rhetoric about thrift and austerity.

Coincidentally or not, UK retail sales fell in August, missing expectations. And German consumers hardly seem ready to pick up the slack.  No wonder “investors remained nervous and uncommitted in the absence of clear market direction,” as Deutsche Bank (NYSE: DB) put it in its recent profit warning.

Asian stock markets also notched five-month highs this week, and the rally seemed a lot less mysterious than Europe’s. Growth across Asia remains robust, boosted by rising incomes and ample savings.

As Lawrence Roulston notes, China and other emerging markets are continuing to drive strong commodity demand, pushing up prices of everything from copper to cotton. Roulston has been predicting gold’s current breakout to record highs. The yellow metal has become an alternative currency for savers around the world, one that won’t get devalued to spur job growth.   

The rally in emerging markets means that some of the biggest bargains seen this summer have been snapped up. Late arrivals to the party must worry about buying in at a temporary top. But Andrew McHattie profiles a London-listed fund that’s prospered by picking European companies with strong emerging-markets prospects. This focus has allowed it to handily outperform rivals.

Benj Gallander’s pick is more of a turnaround play, a Canadian trust that couldn’t be less sexy. What it does boast is a generous yield and a shot at capital gains to boot. In this low-interest era, that’s nothing to sneeze at.

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