Europe’s markets aren’t doing so well. You may think: does that even affect me? In short: yes.
Although European stock markets made gains in 2012, things are not as rosy as they seem. Instead of this being due to economic or company profit increases, it had its origins in cuts to interest rates and the European Central Bank (ECB)’s sturdy underwriting of the bond market.
The ECB was in fact compelled into providing this exceptional degree of underwriting because of the anaemic state of the European markets. In the past five years since the GFC, Europe’s economy has only marginally recovered. The economies of Italy, Spain, Portugal and Greece are actually smaller today than they were pre-GFC.
Even Germany, Europe’s strongest economy, is struggling. In disturbing news, their government bond profile has recently been downgraded to zero returns at two years.
The EU is Australia’s leading investor with an accumulated investment of $A647 billion at the end of 2012 – 31 per cent of total foreign investment in Australia*
Yet there’s always a silver lining, albeit in this case, a faint one. Europe’s trade account has been progressing largely thanks to German manufacturing. The flipside
of this, however, is a reduced demand for imports amongst the weaker European nations.
Why Australians should take stock
The world’s economic progress depends on the improvement of Europe; global economies are inextricably interwoven. As such, the IMF and the World Bank decreased their projections for global growth as a direct upshot of Europe’s declining growth prospects.
On a more specific note, Europe’s economic circumstances immediately impact on our markets through Europe’s endowment of wholesale debt capital to our banks.
In today’s world, nothing, especially economics, is nationally discrete. We must be aware of global issues and take corresponding action, if necessary. In this case, all we can advise is to hang on to your European equities; things will eventually become rosy.