As mentioned before, long-only investors need to stay away from problematic global financials and focus on those that that have no credit risk on their balance sheets — like MasterCard (NYSE:MA) and Visa (NYSE:V). As for European investments in general, the purchasing power parity (PPP) of the euro for the total eurozone, according to OECD, is at about $1.25. It is easy to see how all this stress in Europe is likely to drag the common currency below PPP as the drama is ongoing. The depth and speed of the euro decline is dependent on if/when countries begin to leave the monetary union.
The most problematic stocks to hold in such an environment are European financials, whose ADRs are coming under pressure because of a decline in the currency as well as intensifying issues with their balance sheets.
A complete disintegration of the euro that goes back to the original currencies that made up the eurozone is a step in the direction of a disintegration of the European Union itself. While such an outcome is a low probability at present, the developments over the past two years certainly have made it a possibility. This is why 10-year German bunds — the safest euro-denominated sovereign bonds — have defied gravity and been bid up to unseen heights with yields dropping to 1.17%.
The decline in 10-year Treasury notes to 1.44% in June is due to a flight of capital out of European sovereign debt markets, as Treasurys still are the most liquid non-euro denominated debt instrument. Government bonds like bunds and Treasurys that offer safety in such an environment can see yields fall to even more absurd levels should the situation continue to escalate.
The ultimate safe haven asset — gold bullion — has not been a great performer in the present environment. This is because the outflows from in euro-denominated assets have pushed the U.S. dollar higher, which historically has not been bullish for gold. Still, it has to be mentioned that gold bullion is the only asset that is not also a liability on anyone’s balance sheet, so it does offer a hedge in the present environment, as a gold bar cannot fail in the financial sense of the word — it still will be here after this crisis is over.
Do not confuse silver, palladium and platinum with gold in the present environment, as I have noticed that in calmer times they trade like precious metals, while under rising financial system stress they begin to trade like industrial metals. During the past 12 months, as the euro crisis has been intensifying, silver, platinum and palladium all are down more than 20%, while gold still is up around 5% despite the recent pullback. The same goes for gold stocks, which are leveraged investments and can be quite a bit more volatile than bullion itself.
As this crisis unfolds, the unlikely trio of U.S. dollars, Treasurys and gold can offer a necessary hedge.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in MasterCard and Visa for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.