An investment strategy is most certainly focused on capital gains but also should reflect ones perspective on tail risk events that might occur. Europe for the last four years has been a headline that has moved markets and portfolios. It now appears as if a new and dangerous chapter is beginning relative to Europe's financial solvency. Europe fear is returning, and for good reason.
Germany and France trumpeted that the path out of financial darkness must begin with austerity and spending within a reasonable budget.
Nations across Europe adopted a policy of cost controls, lower employment, and an overall cutback in spending. But with the collapse of the government in the Netherlands, and the likely change in leadership in France, it appears that a new perspective is taking hold in the euro zone. The United States model, which focuses on stimulus and easy money, appears to be the more favored path for many countries as opposed to austerity.
It's pretty clear what the United States plan for recovery is. Like it or not, America has determined the cheap money is the adrenaline the economy needs in order to stimulate GDP growth. The US Federal Reserve has embarked on a series of easing strategies which stimulated the US economy but with an uncertain long-term cost. The United States is in uncharted territory and it remains to be seen if current policies are effective on the long-term. The US government has declined to cut spending in any significant way and so easy money is the functional policy for the United States, not disciplined spending. Certainly this feels better on the short term but one cannot help but wonder if this is the best path forward for the long-term.
Despite the uncertainty related to the United States path for recovery, Europe seems to be embracing the American plan. With the consequences never higher, Europe now appears to be having a change of heart that will likely cause anxiety for the market and investors. Europe seems to be tiring of pain and austerity and there is now a chorus of voices saying let's adopt the United States way.
This change of course threatens the stability of the European recovery and the global economy; markets dislike more than anything uncertainty particularly if the confusion on policy does not chart a clear strategic path forward. Uncertainty reigns; Europe seems to be confused as to what the path should be with the IMF and the European monetary agencies seemingly at odds.
As a portfolio manager, we believe strongly that investing should factor in not only return possibilities but risk events as well. We are avoiding Europe with limited exceptions (we like Vodafone which has a thematic tailwind of wireless connectivity). The United States, with high dividend rates, is likely a better location for equity investment until Europe finds the coordinated will to take action on its fiscal woes.
Multinational companies that benefit from emerging market growth also provide opportunities for investors. McDonald's , Starbucks , and Disney are just a few of the names that provide opportunities for investors. While these companies do have exposure to Europe, they have even more growth opportunity in emerging markets and this is a place where investors need to be for the long-term.
It never ceases to amaze me how leaders fail to recognize that the market is carefully watching for coordinated action in addressing fiscal problems. I think the term for that is leadership. And right now it seems as if there are multiple leaders but not a coordinated voice outlining a clear strategy. And doubt will certainly impact growth and the discord across Europe will likely deepen the recession that Europe is already in.
Sometimes buying broken assets makes sense for a portfolio strategy; this is not one of those times. We suggest avoiding Europe and instead diversifying your portfolio into United States assets as well as emerging market positions. We will reconsider Europe when evidence emerges that a coordinated plan is in place to move Europe past its current fiscal crisis. We are watching as is the rest of the world for clarity, solidarity, and a plan to once and for all kill the financial crisis in Europe.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.