Tags: Parisis | eurozone | investing | kroner

Many Big Companies Avoid Investing in the Eurozone and You Should Too

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Tuesday, 07 Aug 2012 10:44 AM Current | Bio | Archive

Over the weekend, Simon Henry, chief financial officer of Royal Dutch Shell, said in an interview that the Anglo-Dutch oil giant transfers funds, which are part of its liquidity reserve that stood at the end of June at $17.3 billion, out of the eurozone in order to avoid growing macroeconomic risks mainly caused by the ongoing and still metastasizing EU debt crisis. Henry stated he would rather deposit $15 billion of cash in non-European assets, such as U.S. Treasurys and U.S. bank accounts.

Also, U.K. pharmaceutical giant GlaxoSmithKline CEO Andrew Witty said earlier this year his company doesn’t keep, on a daily basis, free cash in most of the eurozone countries and transfer “tens of millions of pounds” from the eurozone to London. It has also been reported that similar precautions are been taken by the cleaning-product manufacturer Reckitt Benckiser, Diageo, the world's largest spirits company and maker of Johnnie Walker, and the brewer Heineken.

While this is not important for traders, I think for long-term investors it could be wise to take notice of these precautionary actions from these "well-informed" institutions.

Since last week, we have seen some kind of a tempered “risk on” again, thanks to Friday’s better-than-expected U.S. non-farm payrolls report, which helped to boost sentiment in the short term, and European Central Bank President Mario Draghi’s drastic, but nevertheless strictly conditional, intentions (plan) of direct intervening (buying) in the EU sovereign (Spain, Italy, etc.) bond markets.

It is interesting to take notice that at the same time, money flows as of Aug. 6 show the euro is modestly net sold again, which could suggest that the recent relatively small rebound of the euro could be taken as an opportunity by global investors to pare exposures to the euro.

That said, it is a fact that lately, that same group of global investors seems to have begun looking beyond the eurozone for locating elevated cash balances during periods of risk-aversion pullbacks.

From my side, I will remain skeptical on the euro and the eurozone as a whole until EU policymakers are able to finally show they are implementing, not promising, serious, concrete and transparent measures that really address the EU sovereign debt crisis instead of continuing their delusional thinking and smoke-and-mirror exercises that don’t provide solutions at all to the deeply rooted structural and political problems of the eurozone.

Anyway, until Sept. 12, which is the date the German Constitutional Court will communicate its position on the constitutionality of Germany’s contribution to the eurozone's permanent bailout fund, the European Stability Mechanism, we should not expect too much from the EU decision makers, and also because August is their vacation month. Coincidently, on Sept. 12, there are general elections in the Netherlands, which is one of the so-called core eurozone member states. On Thursday of this week, France’s Constitutional Council is due to issue a verdict on whether the transposition of the balanced-budget rule laid down in the EU fiscal treaty requires changing the French constitution.

In the mean time, Italy remains in dire straits, as its just-released gross domestic product numbers show and this could provoke political turmoil in the foreseeable future. Italy’s economy continued to contract by 0.7 percent quarter over quarter (q/q) in the second quarter, while contracting 2.5 percent year over year (y/y). This follows contractions of 0.8 percent q/q and 1.4 percent y/y in the first quarter. Today’s numbers are the fourth consecutive q/q contraction. It is interesting to take notice that the Italian economy is now only 0.3 percent larger than it was in the second quarter of 2009. It is expected that third quarter will see a new low for Italian GDP.

The Italian National Institute of Statistics also just reported the Italian industrial production index decreased 8.2 percent y/y in June. Yes, this situation, alongside with those of the other troubled EU nations, will not be helpful for finding solid solutions for the eurozone crisis.

I don’t think it’s an overstatement to say that, for the moment, investors are practically flying blind when it comes to the eurozone crisis. We have no other choice than to wait, hopefully not too long, until that sight loss disappears.

As a long-term-investor, I would still avoid the eurozone and the euro itself. There will come a day when both will become attractive again for long-term investing, but I’m afraid that could be still far away.

My preferences remain in favor of the United States and the dollar because of the global risks. This doesn’t mean the United States is risk free. Remember, it still doesn't have a workable solution ready for the “fiscal cliff” that comes at the end of the year, which could cause a lot of damage if politicians clinch again.

Of course, physical gold keeps its place amongst my preferences, as does the Norwegian kroner even if it doesn’t have the safe-haven status but is nevertheless at a 9.5 year high against the euro. It is also expected that the Norwegian Central Bank will be obliged the raise its key interest rate before the end of the year in order to temper real-estate prices at home.

As I said before, I wouldn’t care about short-term, risk-aversion pullbacks and prefer to remain prepared to act quickly, without any constraint, everywhere I want and when I want. Of course, that’s how I see it and I don’t have a crystal ball.

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2012-44-07
Tuesday, 07 Aug 2012 10:44 AM
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