28 May 2013

“More of the same is to be expected from Europe for the rest of the year: reactive decision making, political turmoil, and volatility contagion into both stocks and bonds. Here is a summary of the situations in the major countries. Let Firstline help you figure out how to preserve your capital, and possibly even profit from the situation.”








Every summer it’s the same drill. After a strong start to the year, and an ‘okay’ spring, one thing or another happens in Europe and throws the market out of whack.

While the market transforms from a Rodney Dangerfield rally (it got no respect!) into an extremely resilient and increasingly confident move upwards, it seems like the most serious threats are primarily in Europe.

Here is a country by country overview of factors that could cause turbulence over the coming months. SPOILER ALERT: things don’t look good, and we can help you find ways to insulate your portfolio from any blow ups that may happen over the next 6 months.







Political factors continue to hold France back. President Francois Hollande has the lowest approval rating in France’s history for a president 12 months into their term. Additionally, there have been a number of corruption scandals which have impacted his administration’s credibility.


This is compounded by very heated rhetoric—such as taxing millionaires at 75%—that has led wealthier citizens to relocate to Belgium, Switzerland, and even Russia (in the case of noted actor Gerard Depardieu). The rhetoric has also led businesses to curtail production and there is widespread malaise in the business community; this was reflected in France’s recent dismal industrial production numbers.

Despite everything, we are unlikely to see any changes from the government, which almost guarantees continued economic decline.









Portugal has earned some praise from observers and the market for enacting many austerity measures, and has shown some improvement in its credit metrics. Portuguese bonds were solid performers last year.

However, there has been some pushback from the citizenry on austerity, and pushback from the markets and the Germans on the pace and reach of reform. It is likely that Portugal will need a bailout extension, but the terms are likely to not be very generous, which will only compound the political backlash against austerity.












Spain faces a combination of political factors that mirror its position between Portugal and France. Like Portugal, it is facing backlash against austerity oriented policies.







Like France, they had elections and a rhetorically tough-speaking party came into power that has lost political capital and popularity through corruption scandals. The market also feels that reforms are not coming quickly enough, putting the government in a difficult position between choosing between the electorate and its ability to finance itself and fix its balance sheet.







Italy faced a political crisis when there was no clear winner in their recent election, and the various factions found it difficult to assemble a ruling coalition due to stark policy differences.

This roiled markets not only in Europe and Italy, but as far afield as the U.S. and emerging markets. Italy is a major economy in Europe and not having a clear line of sight as to who would be running the country was a major cause for concern.







President Napolitano has agreed to serve another term at the head of a fragile government, in the interest of providing some stability, and designated Enrico Letta as prime minister. In his inaugural speech, Letta exclaimed that “Italy is dying from austerity alone. Growth policies cannot wait.” However, given the perennially fractious nature of Italian politics, it’s unclear whether Letta will gain enough momentum to enact those policies he so eloquently proposed.









Germany has increasingly focused inward as elections approach this autumn. Angela Merkel faces a veritable challenge as a new party, the Alternative for Germany (AfD) gains tractions and attracts defectors from all major parties. AfD is anti-euro and was formed last year by a group of leading German intellectuals from across the political spectrum.

Throughout the crisis, Germany has been recalcitrant and reactive, and has been the main pusher of the austerity snake oil on the continent. Germany continues to be haunted by the ghosts of hyperinflation from the 1920s and 1930s, when it took a barrel of Deutschmarks to buy a loaf of bread. That experience, plus the austerity the country had to go through in order to reintegrate East Germany into fray, informs much of their policy approach to the peripheral countries and their debt.


However, austerity has been discredited in both practice (none of the countries who undertook austerity are any better off than they were pre-crisis, and in fact most of them are worse) and theory (the results of one of the main papers arguing in favor of austerity was shown to be due to an Excel calculation error, among other mistakes).

It is unlikely that Germany will stray from its austerity mantra, and as the de facto economic power and policy settle within the European Union, they will continue to influence Europe in that direction.



Europe increasingly finds itself between a rock and an even harder rock. Austerity has been a disaster for most of the countries that adopted it, devastating the economies while turning the electorate into a restless and increasingly angry group.

The single currency prevents many countries from devaluing their monetary base to enable them to rebalance their economies and become more economically competitive.

The demographic picture is also unfavorable, as even with growth oriented policies many countries simply do not have the long term population growth to support their economies.

So what is the answer? That is beyond my pay grade but it is obvious that more needs to be done, maybe the combination of spending and easing, as per USA and now Japan, and not in the piece meal, reactive fashion at which it has worked in the past. In the mean time, we can expect Europe to be a main source of volatility, and whether you are in stocks or bonds or both, you should take steps to inoculate your portfolio against the risk that things get out of hand. 

Firstline has a number of options to help you not only protect yourself from benefit from uncertainty in Europe. Please contact us for more details at

Michael J Cooper   
Trading / Investment Strategist
Firstline Securities Limited

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