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Worried About Falling Euro? Five Things Investors Can Do

Despite all the clamor about bailouts and restoring stability to Europe, financial markets aren't buying it. The euro continues to crumble and the outlook remains weak.

Dollars and Euro
Dollars and Euro

So as the euro staggers and Wall Street sweats, is there anything that can assuage investor fear?

"It's a major mess," says Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. "Between what's going on in Europe, what's going on in Congress and our banking sector, there's no wonder why the fear of God is in investors."

Looking specifically at what happens if the euro continues to drop towards parity with the US dollar—and perhaps out of sight altogether—here are five ideas for investors:

1. Beware US Multinationals

As global growth spread following the financial crisis, multinationals were the place to be. A cheap dollar made US exports more attractive around the world, giving big lifts to companies that had a strong concentration of business outside the nation's borders.

But with the greenback rising against the euro, that export equation could change. The result could impact what have been stellar earnings results among multinationals.

"Obviously any forward-looking number that analysts have predicted for the second half for growth would be impacted if the euro continues to decrease," says Bradford Pine, wealth advisor at the Bradford Pine Wealth Group in New York. "You need to be careful of individual companies that do have a large amount of business that they do in Europe. It would hurt corporate profits if this continues."

Europe is a far cry from from the biggest trading partner with the US, but the impact will still be felt.

"It has to at least on the margins," says Quincy Krosby, general strategist with Prudential Financial. "Is it going to bring us back into a global recession? Probably not...But Europe is still a very important market to the United States."

2. Seek Strong Balance Sheets

Each global crisis always brings a good dose of economic Darwinism with it, and the potential collapse of the euro should be no exception.

Solid-balance-sheet companies, then, will find lots of fans—as could small-cap companies that do less business overseas and actually can benefit as the dollar appreciates against the European currency.

The key could be valuation, with investors waiting out a market downturn and scooping up best-of-show firms that get beaten up in a prolonged slump.

"You are seeing investors putting together shopping lists and going into companies that have good balance sheets and can withstand this, and are going to do well regardless of demand slowing down," Krosby says. "Ultimately, are the valuations on these companies in the market commensurate with where growth is going to be? That is the bottom line."

3. Stick With Bonds

The flight-to-safety was on steroids at the apex of the US financial crisis, at one brief point sending Treasury bill yields below zero.

Though not as pronounced this time, the euro's drop has been cited directly for advances in Treasurys, which were supposed to be in a full-fledged bear market now as US debt and deficits piled up and investors shunned auctions.

But the euro crisis has renewed interest in Treasurys, and there is no clear end in sight. The yield on the 10-year has dropped from 3.72 percent to 3.45 percent in just the last 10 days.

"At some point Treasurys are going to get a little too expensive," Rupert says. "I'm not sure we approach (financial crisis) levels again at least in terms of low yields on coupons. But in this world that's not such a stretch anymore."

The attraction to bonds could extent to corporates as well.

Recent research from Bank of America-Merrill Lynch shows that a declining euro is unlikely to widen the yield curve on high-grade corporates—meaning that they'll remain a good safety measure in a time of turmoil.

The trend holds even though equity investors in multinationals would get stung by a continued euro drop. Companies in the high-grade market do 27 percent of their sales in foreign markets.

"However, sectors with the most foreign currency exposure, such as chemicals, technology and industrial products, are trading at tight spread levels," BofA-Merrill said in a research note. "What this means is that companies in these sectors tend to have less leverage and thus changes in earnings accrue mostly to shareholders, with little effect on credit spreads."

More Strategy: Go for Gold, Go for Cash

4. Go for the Gold

Besides Treasurys, the other big beneficiary of the euro drop has been gold, which has hit a succession of all-time dollar highs.

Traditionally thought of as an inflation hedge, the metal has now become a safety play against euro demise.

"Investors who have assets held in euro currency are concerned they are holding useless currency," says Andre Julian, senior market strategist at OpVest Wealth Management in Irvine, Calif.. "Gold is the new reserve currency. It's gone beyond an inflation hedge."

Julian thinks $1,500 is a realistic price target for gold this year, with $2,000 a possibility if stability is not restored to Europe.

"Technically there's nothing stopping it from continuing," he says. "Investors are fearful of the capital markets."

5. Safety in Cash

Some sense of euro-zone stability will be only thing to stop the currency's plunge, analysts say.

And with leaders seemingly unable to agree on a future path not only for Greece's debt problems but also the likely contagion to follow, the investment landscape will remain one primed for safety moves.

Money on the sidelines, earning almost nothing in money market funds, remains at $2.88 trillion, according to the Investment Company Institute.

"From a point of worry, the biggest concern would be the European response does not continue to be progressive but becomes regressive and more traditional," says John Stoltzfus, senior strategist at Ticonderoga Securities in New York. "European leaders have been known, sadly, to pull the wrong lever in the middle of a crisis."

Stoltzfus advocates a strategy he calls "hedging the cyclical and funding the secular," or essentially using fundamentals but adding provisions for temporary market developments.

Other managers, such as Mike McGervey, president of McGervey Wealth Management in North Canton, Ohio, are listening to models that say this is a good time to start raising cash. He said his firm raised 15 to 20 percent crash after Monday's relief rally and probably will accrue more after this week.

"We're starting to play defense," he says. "That strategy has served us well in terms of minimizing losses—especially during times of economic crisis."

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