Morningstar Advisor - February/March 2012 - (Page 48)

Spotlight While EU officials still need to formalize the mechanisms needed to enforce fiscal restraint and fine-tune some of its key measures, the main achievement is that all member states have grown to accept the need to adopt a unitary fiscal structure. Europe, therefore, might emerge again as one of the strongest entities in the world, at least politically. Debuysscher says that we might be witnessing the start of Europe and the United States taking divergent economic paths. The United States could be on a higher growth path— comforted by recent positive employment figures and some inflation stemming from an aggressive quantitative-easing policy coming from the Fed. Europe, on the other hand, might follow a longer-term “Japanese scenario,” with low growth and low inflation. Finally, Debuysscher believes that the outlook for the European banking system, the collateral victim of the debt crisis, should actually improve over the medium term. He says that European banks reduced their exposure to government bonds by two thirds over the course of 2011, gradually deleveraging and cleaning up their balance sheets. He says that year-end figures published by banks will be a positive surprise, which should help market sentiment and alleviate current nervousness. Hamish Douglass, CEO, Magellan Financial Group (Australia) to go up, it is adding pressure for change to happen politically and economically, which is fundamentally in its own interests. Douglass says that he has been very impressed with German chancellor Angela Merkel’s leadership during the crisis and that we might be witnessing the rise of Germany as a potential new superpower that ultimately won’t let the EU collapse. He says that Germany is in fact running the largest global trade surplus (larger than China’s, relative to GDP). The Germans are tied to a currency that fundamentally undervalues their competitive advantage in terms of exporting, and they want to maintain that advantage, just as China wants to maintain its advantage. Andreas Busch, senior macroeconomist, Bantleon (Germany) “The current political structure of Europe makes it extremely difficult to build a consensus around a workable solution, thus hampering public confidence further,” he says. “As the core members of the eurozone have benefited significantly from the euro, it is in their best interest to find a solution in the first half of 2012. “However, there could be a significant impact on the more peripheral European economies both within the euro and those looking to join— and this impact is currently too difficult to call. Until a workable solution is tabled, the short term will remain volatile due to swings in confidence. Once a viable solution is found, confidence should slowly start to improve and the market will be able to refocus on the underlying economics of each business.” K Mara Dobrescu is a mutual fund analyst with Morningstar France. Busch believes that politicians alone cannot solve the debt crisis. “Sooner or later, the European Central Bank has to come to the rescue if the monetary union is to be saved,” he says. “Given these facts, it is more than questionable whether the ECB can keep on hiding behind the excuse that it is not allowed to finance government debt. This argument is not very credible in any case, as it has not prevented the ECB from buying more than EUR 200 billion of peripheral countries’ debt so far. “It will also be crucial for the ECB to continue buying sovereign debt—not in order to fund government budgets, but to shore up the economy. The exceptionally high interest burden that we are seeing in peripheral countries could intensify recessionary trends, trends that the central bank can only counteract over the short term.” Michael Hatcher, director of research, Trimark Funds, Invesco (Canada) Douglass’ analysis is that Germany is actually in full control of the European situation. He says that while markets are reacting negatively to the uncertainty (an extremely frustrating situation for investors who would love a more definitive solution to end the bond crisis), the Germans aren’t fazed. They want to keep the pressure on Greece, Italy, Spain, and even France and force through measures that are going to put Europe on a more stable footing for the long term. According to Douglass, Germany believes it has time on its side, and by allowing bond yields Hatcher says that the key issue surrounding the current sovereign debt crisis is public confidence. 48 Morningstar Advisor February/March 2012

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

Morningstar Advisor - February/March 2012
Contents
Contributors
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