My portfolio has a significant allocation to Euro-zone investments*. This includes equities, fixed income, and cash. But, better late than never, I am wondering what, if anything, to do to protect myself against a likely Greek sovereign default.
My read on the Grexit situation is as follows:
- Worst case, all hell breaks loose. Dominos start to fall. Chaos erupts. Nothing is safe. This scenario will have me worrying about much bigger things than the thin sliver of my portfolio that is in Euros.
- Best case, the Greeks exist the Euro pretty painlessly (for everybody apart from the Greeks and maybe some stranded tourists). Under this scenario I think it is possible that after a brief hiatus the Euro starts to appreciate, as the weight of worry on its shoulders would have lifted a little. This view is probably unrealistically optimistic because attention is likely to turn to Italy, Spain and France next, and that weight of worry will make the Greeks seem like a feather.
- Central case, the Greeks exit the Euro and there is some significant market volatility for some time to come. In particular it is possible that the Euro depreciates out of stress/panic; that consumer spending drops causing GDP to fall in the Euro-zone; that there is an investor flight to safety; and that probably you’ll see an increase in reform activity in Italy, France etc as the public starts to ‘get it’ about the need to avoid a similar fate befalling them.
My key question concerns what to do with my Euro cash holdings. Right now I worry most about a precipitous fall in the Euro, and think I’d rather hold real assets. Which rules out bonds, which are nominal assets not real assets. Given that I rule out owning property in foreign countries, this leaves equities. In other words I am leaning towards a temporary shift of my target allocation of cash into equities. I suppose one might argue that I should shift my allocation out of Euros entirely and into USD or GBP but somehow that feels like a step too far. And I think there is real upside for the Eurozone over the medium and long term.
If I want to buy some Eurozone equities right now, what is the right thing to buy? The textbook says passive, but I don’t have much faith in the passive ETFs covering the Eurozone stock markets. So I’d prefer to buy blue chip stocks which are:
- Not in France, where the transaction tax seems to have scuppered foreign investors.
- Not in Southern (Catholic?) Europe, which I think is going to be most likely to receive collateral damage from a Grexit.
- Decent dividend payers. Ideally one from NoMoreWaffles’ Euro Dividend Stars list, or one like it.
- Own global brands. I like brands, and I think brands are ‘real assets’ that are quite resilient against currency movements.
This suggests my short list is:
- KONE. Global brand and market position. But Helsinki – I’ve never traded there and don’t want to start now.
- Royal Ahold. Strong brand in Holland, but I am leery of what has happened to Tesco.
- Axel Springer. Media. Yuk. Owns strong brands in Germany but not world-class ones. No thanks.
- DSM. Never heard of it. Too far from my comfort zone.
- Reed Elsevier. Media, but with some good brands, and competitive on the world stage. I’ve never really rated the company but I would accept it is probably not too disrupted by Grexit.
- Royal Dutch Shell. As global as it gets. But with oil prices where they are right now, and likely to stay low if US fracking continues apace, then I’m unsure of the future trajectory. Would appreciate more input.
- Texaf. Belgian. I know nothing about it. Not sure about the Belgian stock exchange.
- Wolters Kluwer. Media. Similar to Reed but worse, right? Reminds me of ABN Amro and look what happened to them.
Obviously none of this is deep analysis but the picks of the bunch above appears to be Reed (P/E 25, div yield 2.4%) and Shell (P/E 10, dividend yield of ~5% I think). Both of which are traded in London, thankfully.
Any views or suggestions would be much appreciated.
* Actually, Euro-zone stocks falls under ‘International’ in my portfolio but I think of this as mostly Euro-zone. I spend significant time in Eurozone countries. The Euro-zone economy is almost as big as the US economy. While its equity capital markets are significantly smaller, they still contain some great companies and should, in my view, form an important part of my diversified portfolio.