Morningstar Advisor - February/March 2012 - (Page 7)

Letter From the Editor Old-World Problems We again look at an economic hot spot in the world. Last issue, it was China and its unsustainable investment boom. This issue, it’s Europe and its sovereign debt crisis. And once again, we get to use Morningstar’s global resources to give you research from experts and analysts based around the world. They don’t like what the see in the eurozone Echoing his presentation at the Morningstar ETF Invest Conference in late November in Milan, Francisco Torralba, an economist with Morningstar Investment Management, says that European leaders have wrongly pegged the cause of their problems on “fiscal profligacy” (“How Europe Is Making Its Crisis Worse,” Page 38). Because they got the cause wrong, their solution—austerity—is misguided, he says. Torralba predicts a deep European recession in 2012, which in turn will create a vicious loop between no growth, even-larger deficits, sovereign defaults, and insolvent banks. The way out? “Radical monetary intervention, default, or a split-up” of the monetary union, Torralba says. Ben Johnson, Morningstar’s director of ETF research, got an equally blunt assessment in his Morningstar Conversation with two Europe economic experts—George Magnus of UBS and Edward Chancellor of GMO (“Europe on the Brink,” Page 50). Magnus says that the economic policy response to the crisis is turning Europe into a region of rising unemployment, weak growth, and economic slumps. Chancellor brings a historical context to the discussion and reminds us that it wasn’t the out-of-control inflation of the 1920s that led to Germany’s political chaos in the early 1930s; it was a period of deflation. Both Chancellor and Magnus see years of “recurring crises” ahead in Europe. As U.S.-based investors, we need to keep our eyes on a few things. First, because the United States exports an insignificant amount of items to Europe (“Impact on U.S. Economy Will Be Minimal,” Page 41), the U.S. companies that will be most affected by a European recession will be multinationals that manufacture products in Europe and Asia to sell to European markets. And then there are the banks. Europe’s banks are more interconnected with sovereign governments than banks in the United States. Any break in this chain will set off a devastating reaction. On top of that, the balance sheets of Europe’s banks are notoriously opaque, making it very difficult for investors and analysts to see exactly what shape they are in—difficult, but not impossible. Senior bank analyst Erin Davis put the European banks that Morningstar covers through a series of tests to determine their health (“European Banks: Bargains or Value Traps?,” Page 42). She actually found a handful of banks that should be able to withstand defaults. As you can imagine, for companies in a teetering industry, shares of these banks can be had at pretty good prices for the risk-tolerant investor. If you’re looking for more optimism, analyst Mara Dobrescu reports that many fund managers who invest in Europe think that the depth of the crisis is overblown and that the euro will survive (“Don’t Count the Euro Out Yet,” Page 46). Whatever happens in Europe, and elsewhere, rest assured that Morningstar will be able to provide an impartial, in-depth view of the ramifications. You’ll need us. As our past two issues have shown, it’s a challenging time in the world of investing. Jerry Kerns Follow Jerry on Twitter @ jerrykerns 7

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