The eurozone has sent waves of confusion through the global economy, and investors are concerned about what it could do to their portfolio. To say the very least, investors have all the right to be worried—bulls and bears are creating noise, making investment decisions even more difficult to make.
The eurozone is in recession for the second time since 2009.
Back then, the problem was the debt-infested nations like Greece, Spain, and Portugal that swept the region with a slowdown, but now things appear to be different. The strongest nations like Germany and France are showing bleak performance. Similarly, other smaller nations that didn’t even make the news before are now in the headlines—just look at Slovenia and the Netherlands, for example.
Why is this a concern? The problem at the very core is that there are America-based companies that operate in the eurozone. If the region suffers through severe economic slowdown once again, the demand from consumers will decline due to high unemployment. As a result, the U.S. companies will see their sales decline, and eventually, their portfolio will deteriorate.
To fight this economic slowdown in the region, the European Central Bank (ECB) has taken some major steps. For example, to reduce the risks of the region dissolving, the ECB said it will “do whatever it takes” to save the region. (Source: “Verbatim of the Remarks Made by Mario Draghi,” European Central Bank web site, July 26, 2012, last accessed May 7, 2013.)
On May 2, the ECB announced a cut in its interest rates, lowering them to 0.50% from 0.75%. In addition, while slashing the main interest rate, the President of the ECB, Mario Draghi, once again reminded the public that the central bank is ready to take action if needed. (Source: Steen, M., “ECB ‘ready’ for more action after rate cut,” Financial Times, May 2, 2013.)
From a bullish point of view, this may just be the worst thing the eurozone could have done, and its only upside from here. The reason: the central bank is taking an active role in helping the region get on its feet and back on the path towards economic growth.
With all this said, the question still remains: can the eurozone do anything to investors’ portfolios here in the U.S.?
No matter which side an investor may be on—bull or bear—towards the eurozone, one thing they should remember is that there are still some risks on both sides.
Investors should focus on risk management and make sure their portfolio isn’t too exposed to the region, regardless of their take on the eurozone crisis. The reasoning behind this is very simple: if they are overexposed to the region, good news can eat the portfolio of an investor who is bearish and bad news can kill the return of an investor who holds a bullish view on the area.
Instead, allocate only a certain portion of your portfolio towards the eurozone. That way, if things turn in the opposite direction, you won’t end up having a huge dent in your portfolio, causing a delay in the time it takes to reach your retirement goal or whatever you are investing for. Remember to adjust your portfolio as economic conditions change—keeping the same asset allocation and risk exposure can be harmful.