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Euro-Proof Portfolio: 3 Sectors and Treasuries

Take shelter in utilities, health care, telecoms and U.S. debt


eurozoneGreeks go to the polls in less than two weeks, and judging by the market’s reaction, the fate of the euro hangs in the balance. How it all unfolds is unknowable — there are too many contingencies and moving parts — but if Greece does look as though it’s headed back toward the drachma, the punishing correction the market has seen over the past month will look like child’s play.

We’re already seeing what the threat of contagion looks like. Witness the spike in yields on the sovereign debt of Spain and Italy. It’s becoming too expensive for the governments of those nations to borrow in the capital markets — and they are both far too big to be bailed out.

Standard & Poor’s puts the odds of Greece leaving the eurozone at one in three. The follow-on effects are harder to forecast, but if past is prologue, your equity investments will get slammed. A full-blown global financial crisis — another Lehman Brothers-type event — will leave investors with few places to hide.

Still, a look at how the market has behaved over the past month of heavy selling yields insights into which sectors might hold up better than others. Predictably, defensive stocks are where you want to be, namely utilities, telecommunications and health care.

The only sector of the S&P 500 Index that managed to stay above water over the last month of trading through June 5, notching a 0.33% gain, was utilities. Health care stocks came in second over the last month, losing only 0.92%. Telecoms were the third-best place to be, with a 0.96% decline.

Here’s what you want to avoid: The worst-performing sector over the past month was industrials, with a 3.59% decline. Financials fell 3.04%, followed by consumer discretionary stocks, which dropped 2.28%.

You wouldn’t have gotten rich on the three best sectors, but heavily overweighting your portfolio with them and underweighting those pro-cyclicals would have mitigated your holdings’ pain.

What about overseas investments? Naturally, the last place you want to be is in European stocks, especially the Eastern European emerging markets. That’s probably true even if the Greek election turns into an unambiguous endorsement of sticking with the euro — because the crisis will hardly be over.

“We realize there could be rallies in European assets but believe there is an unfavorable risk/reward profile and prefer a defensive U.S. asset allocation for developed-market exposure,” writes Michelle Gibley, director of international research at the Schwab Center for Financial Research.

The eurozone, after all, is large and intricately linked with other economies through trade and the banking system, Gibley notes. The U.S., however, is far more diversified, with total exports to Europe representing just 14% of GDP. That offers some insulation from the effects of the eurozone debt crisis. Domestic corporate profits will be hurt, no doubt, but they’ll hold up better than Europe’s.

So, yes, U.S. stocks will suffer in a euroquake, but they should hold up better than anything in Europe or most international developed markets. Remember that the Dow Industrials and S&P 500 were the best houses in a bad neighborhood during the last giant rout in equities.

But the only way you’re likely to truly euro-proof your portfolio is to join the flight to safety in Treasury debt. Just look at what yields have done over the past few weeks and you’ll see a rush that will only accelerate if the eurozone really does start to crack apart.

Demand for Treasuries recently pushed the yield on the benchmark 10-year note to an all-time low. (Bond prices and yields move in opposite directions.) True, prices are sky-high and the income component is pitiful, but history shows that a wide swath of Treasury debt won’t just protect your principal, it will also generate decent returns.

For the year to date, the longest-duration Treasuries (20- and 30-year bonds) have returned nearly 7%, according to Barclays Capital. The 10-year note has gained more than 5%, as have TIPS, or Treasury inflation-protected securities.

The caveat there is that Treasuries look frothy and depend on lots of bad news to stay afloat.

But if a euroquake does indeed come to pass, the ensuing panic will force global capital into the bunker with Uncle Sam and his printing press. That may very well be the only safe place to hide.

Article printed from InvestorPlace Media,

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