Let's face it. The European Union is facing the ultimate test of stability as it is forced to bailout struggling nations. The recent downgrade of Italian and Spanish bonds further complicate an already difficult situation. Most investors would be bearish about investing in European stocks and bonds. After all, many of them are at the brink of default.
However, I will take a contrarian stance when I say that I am cautiously bullish about Europe. The fact of the matter is that the EU cannot afford a domino effect caused by allowing critical bank failures in its member states. Such a thing would damage their credibility. To me, this indicates that even though European stocks and bonds are volatile and cheap, the EU acts as a buffer against some of the risks which is reassuring. All an investor would have to do is to pick from the less troubled nations who are more likely to have stronger recovery and wait things out. Because of the severe drop in price of stocks and the high yield of the troubled bonds, the return on investment could be anywhere from a 120% to %4000.
On the other hand, I have a strong reason to believe that the austere financial policies required of nations to receive bailouts will delay any returns on investment as deep budget cuts and high taxes have been proven to inhibit economic growth. Also, many nations are facing strong resistance from their citizens to the austerity measures imposed, leading to riots and mass arrests. Many investors may not have that patience to wait that long for a return.
For those who chose to invest in European equities, here is a list stocks that you should have a look at:
- Lloyds (LLOY, LYG)
- Bank of Ireland (IRE)
- UBS and Credit Suise (CS) (Non-EU banks, but the largest banks in Switzerland and too big to fail)
- Royal Bank of Scottland Group (RBS: NYSE version)
- Deutsche Bank AG (DBK)
- UBI Banca (BIT:UBI)
I'd also look at Portuguese 10-Year Bonds with yields as high as 13.8%.
What ever you choose is up to you, but Warren Buffett, one of the greatest investors of all time has been quoted as saying, "be fearful when others are greedy and be greedy when others are fearful."