Sunday 11 December 2016

Diversification away from euro-based assets is a very timely hedge

Published 12/08/2010 | 05:00

FEELING a little depressed about your share portfolio? Need cheering up?

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Here's a thought: the euros in your pocket have rallied more than 7pc against a basket of currencies since June when the single currency hit a four-year low as doom mongers (including Sharescope) worried about the euro's disintegration.

In retrospect, the European Union-led €750bn regional aid package acted as some kind of floor for the currency and marked the beginning of a new period of optimism which has been copper-fastened by the unexpected strength of the German economy.

Still, it is a sign of just how bad things are that the markets welcome the IMF-funded bailout of the people who brought us Aristotle, Plato and Alexander the Great.

The important question is whether this bounce is desirable and whether it will last.

The answer is probably 'no' in both cases.

Rebound

The German economy's rebound is export-led and those sales have benefited from the weak euro, just as our own economy is beginning to show new signs of life as exports to the UK begin to pick up following months of currency weakness.

With both the private sector and the public sector reluctant to take further wage cuts or work much harder, the only way we can continue to improve our competitiveness is by devaluing our currency.

The recent gains for the euro are not good news for Europe's exporters and it is difficult to see policy makers welcoming further gains.

Luckily, perhaps, those gains are unlikely to last long. It is impossible to predict what the trigger for a new crisis will be.

Currency movements are too opaque and too mysterious, but there are so many potential triggers that it is inevitable that something will pop out of the blue and knock the euro back, just as the Greek crisis did.

Let's take Ireland -- the euro-zone country after Greece which is currently being forced to pay the most to borrow money because the markets have little faith in our ability to repay.

What will happen to Ireland if the European Commission rules next month that the fantastical plan to allow Anglo Irish to somehow morph into a business lender is just that: fantastical?

We have been told endlessly that the forced closure of Anglo would cost tens of billions of euros. This would cause havoc for Ireland which would have to borrow vast amounts of money immediately.

The decision now rests with a few European civil servants, who have been asked to consider whether Anglo has a chance of becoming a viable bank rather than worry about Ireland's borrowing requirements.

Nobody knows what the officials will decide but it is quite obvious that any decision to close down Anglo would pose a threat to Ireland's economic independence and, therefore, to the euro itself.

Anglo decision

A decision to close down Anglo would be like flicking on a light in a dark cave to reveal predators lurking around every corner.

It would highlight the Government's inability to honour the bank guarantee if a lender really did go under; the funds that are still needed to save the other banks when they fail to sell off units or merge; the failure to cut spending rather than talking about it; the unsustainable cost of borrowing on the bond markets; and a falling property market vulnerable to any interest rate rise.

It is all too easy to see how a decision on Anglo could trigger a major crisis. It may well not happen, but there are similar skeletons in cupboards right across the eurozone.

Some day soon, somewhere in Europe, one or two of those cupboards will be opened and the bones will come crashing to the floor.

Don't be fooled by the euro's recent gains. They cannot last. Even if they are not temporary, the risk is simply too great to hold all your assets in euros.

It is bad enough that most people's biggest asset is a house which is losing value by the day and which must be paid for in a currency that many of the world's biggest investors believe to be doomed.

While the break-up of the eurozone still seems far-fetched, anybody who wants to protect their savings would do well to assume it will happen.

What, after all, do you have to lose by diversifying beyond the eurozone?

Irish Independent

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