Morningstar Advisor - February/March 2012 - (Page 46)

Spotlight Don’t Count the Euro Out Yet By Mara Dobrescu Despite the challenges, concerns that the end of the euro is near are overblown, fund managers say. While markets have reacted with increased volatility to the escalating debt crisis in Europe, some fund managers are beginning to see light at the end of the tunnel. Europe is embroiled in a full-scale economic, banking, and political crisis, and fund managers, both in Europe and the rest of the world, say they have felt the consequences. During the past year, markets have been reacting with increasing concern to the European Union’s struggle to stave off defaults and restore stability to its financial system, making it often difficult for investors to separate legitimate macroeconomic concerns from short-term market nervousness. Increasing Public Deficits What Fund Managers Are Saying While much has been said about the possible breakup of the euro, and even the European Union itself, many of the fund managers we speak to have a more nuanced view of the situation. First, most agree that concerns about the end of the euro are overblown—there is enormous pressure to keep the monetary union afloat. Second, they acknowledge that current fiscal reforms are part of the solution and that European countries will likely go through a period of deleveraging by reducing their spending and increasing taxation—although not all agree on the actual consequences to expect from a prolonged period of fiscal restraint. Finally, fund managers agree for the most part that increased ECB interventionism is a positive signal, although it might not necessarily prove sufficient to ease credit and monetary conditions. To gather views from fund managers across the world, we spoke to Morningstar analysts based in North America, Europe, and Australia who regularly speak to investment managers about their strategies and views on the global economy. Here are some of the views that fund managers have shared with us and their current positioning with regard to the European debt crisis. Demographic trends are adding to the debt burden, as aging European populations imply spiraling health-care and retirement expenditures. Political Paralysis The EU’s cumbersome governance system, which requires consensus among all member states, makes it difficult to react quickly to growing market concerns. In addition to this, profound disagreements between economically “strong” and “weak” countries are stretching the limits of solidarity within the EU. ECB Mandate Europe’s Headwinds The debt/GDP ratios of European countries have been steadily growing, and recent developments have introduced new levels of complexity to the problems facing Europe: Slow Growth The European Central Bank’s focus on preventing inflation means that the eurozone cannot simply inject vast amounts of liquidity in order to devaluate its debt through inflation. Banks’ Exposure to Public Debt For the past few decades, the eurozone countries have been growing at a much slower pace than the rest of the world, including the United States—making the prospect of “growing out of debt” a difficult challenge. Accepting the insolvency of peripheral states by rescheduling their debt is not a realistic option because “core” European banks still hold significant amounts of government debt and would thus incur crippling losses. 46 Morningstar Advisor February/March 2012

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2012

Morningstar Advisor - February/March 2012
Letter From the Editor
Make a Difference Stories, Not Debates
How Concerned Are You About Europe?
Analytical and Independent
What to Ask When a Fund Manager Leaves
Past, Present, Future
Have Financials Gotten Cheap Enough?
Four Picks for the Present
Investment Briefs
Tactical Funds Miss Their Chance
Specialty Retail: Ad Hoc Opportunity
How Europe Is Making Its Crisis Worse
Impact on U.S. Economy Will Be Minimal
European Banks: Bargains or Value Traps?
Don’t Count the Euro Out Yet
Europe on the Brink
GoodHaven Realizes Its Vision
How Index Trading Increases Market Vulnerability
Nonlisted REITS: Handle With Care
Safety Picks for the Many Moods of Mr. Market
On the Prowl for Large- Blend Index-Beaters
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Math That Matters

Morningstar Advisor - February/March 2012