Bank failures are certainly frightening. But when the rioters start to show up, as they did in Greece this year, it can strike the kind of fear that inspires investors to make like Columbus-hoist anchor, set sail and look for another continent.
After the events of 2008, investors certainly can't be blamed for being jittery. Indeed, the European credit crisis has brought a lot of bad memories back to the surface. Talk of sovereign defaults, economy-stifling austerity measures, insurmountable private and public debt and the possible breakup of the euro zone has stirred fears of a double-dip recession in parts or all of Europe. That has some investors worried about a global ripple effect.
For investors here in the U.S., a significant drop in the value of the euro versus the dollar has already taken a toll on international allocations. Making matters worse for the panicky investor is the fact that fleeing from Europe ain't so easy.
International allocations remain an important part of any diversification plan. Yet the average international large-cap fund has between 50% and 65% of its assets invested in Europe and that's not expected to change much, notes Todd Rosenbluth, an equity analyst with Standard & Poor's.
So how does an advisor make sense of the European chaos?
Seasoned international money managers say the real problem is the premise of the question. Don't even try to make sense of it all, they say. You can't.
What's going on in Europe right now is one of those financial tornadoes that will have to run its course, they say. Maybe the euro zone will break up, maybe it won't. The more likely scenario is that debts will be restructured and life will go on. As for currencies, don't even dare make a prediction. In the meantime, the storm is going to churn up a lot of garbage-as well as a few gems. The key is to sit tight and remain fixed on the long term, they say.
Put another way, there's a reason international funds are heavily invested in Europe and expected to remain that way: Managers see the crisis as both creating and destroying value. It depends on where you look.
Some managers add that after the strong rebound in internationals last year, when the MSCI EAFE index rose 32.5% after suffering a 43% loss in 2008, some type of correction was bound to take place. As of June 10, the index was down 15.8% year to date.
"There are a lot of investors talking as if the euro is doomed. There is fear, but I think that also leads to strong opportunities," says Audrey Kaplan, senior vice president and co-head of international equity at Federated Investors Inc. "In Europe, there are probably the best opportunities we have seen in several years."
Investors need to be aware of another fact: While most of the world was shocked to see tear gas and burning tires on the streets of Athens, astute international managers were not as surprised as everyone else. They had been spending the previous two years highly concerned about Europe's private and public debt. While virtually all international benchmarks are in the red so far this year, observers note that some of the best international performers were those that devoted 2008 and 2009 to weeding out overleveraged European companies-particularly those that rely on domestic sales-and hedging against the euro.
"This most recent period reflects the ongoing dilemma faced by the developed world, including Japan and the United States," says Abhay Deshpande, portfolio manager on the global value team of First Eagle Funds. "How to face the consequences of a multi-decade, debt-financed consumption binge. The birds are coming home to roost."