As a British investor, you might feel comfortably insulated from the eurozone crisis. But it would be a mistake to get too comfy. Both British banks and our economy in general have hefty levels of exposure to the eurozone. Any slowdown in economic activity there will have some impact in the UK, and any default could lead to our banking system needing further propping up. So we’re happy to stick with our long-running view that when it comes to equities, you’re best off with sturdy, high-quality defensive stocks that can keep paying dividends even when times get tough.
If you’re looking for a more direct play on the eurozone’s woes, and you can stomach the risk, there’s always currency trading. The simplest way for retail investors to trade currencies is by using spread-betting, but you must familiarise yourself with the way this works beforehand, and understand that you can lose more than your initial deposit, very rapidly indeed, if a bet goes against you. Learn more about spread-betting here – from video tutorials to sample trades. The way things appear at the moment indicate that the US dollar may be back in recovery mode, which suggests that shorting the euro against the dollar could well continue to pay off, just as it did during the Greek crisis earlier this year. (Incidentally, the strengthening dollar could also prove to be good news for Japanese stocks, as John Stepek says: The future is still Japanese).
What about eurozone stocks to watch? We’d be cautious on getting in too quickly – as sterling investors, there’s always the risk that if you buy any euro-denominated stock right now, share prices gains might be wiped out by currency losses. However, Julian Pendock at Senhouse Capital has some suggestions for “first-class global companies” to watch. He likes Nestlé (Switzerland: NESN). “Nestlé India is 2.4 times more expensive than the global listing of Nestlé in Switzerland. The group consistently delivers organic sales growth greater than global GDP growth, with bottom-line earnings set to grow by 9% a year, bolstered by structural emerging markets growth.”
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He is also keen on Spain-based telecoms group Telefonica (Spain: TEF), which is set to deliver “some 27% in dividends over the next three years”. It’s “a cheap indirect play on Latin American growth, and, in a theme we have long argued, is garnering much of its revenue growth from the increase in mobile data – arguably the industry’s growth driver that has been overlooked by the markets. With its dividend yield close to its p/e multiple, the stock looks cheap.”
Pendock is also convinced that investors should keep avoiding the banking sector – “they are simply not marking their assets to market, and there is now a call for a second (hopefully realistic) stress test. Remember, all but two European banks passed the last stress test, shortly before the world realised that they were, and are, in big trouble.” Also, steer clear of “periphery countries’ domestic companies until the dust settles. This is no time for heroics – half of successful investing lies in avoiding losses.”