Best European Countries to Invest In and How to Do It

Between the European economic and financial crises, PIGS (Portugal, Ireland / Italy, Greece and Spain) and various eastern European countries’ high debt ratios (and possible bankruptcies), and the devaluation of the euro you may wonder, are any of the European Union (EU) countries a good investment? Which, if any, EU countries hold worthwhile investment opportunities, the value of which has decreased due to economic and financial troubles in the EU? My goal is to find a diamond in the coal mine.

By way of background, a list of 22 countries which use the euro as their currency is available at Euro currency countries. The major European countries that do not use the euro are Denmark, Sweden, and the United Kingdom. The value of the euro has declined by 13% as compared to the US dollar and Chinese yuan (China's government has kept the yuan pegged around 6.83 to the dollar since mid-2008, when the global recession was intensifying) and 18% as compared to the Japanese yen over the last 6 months (as of June 18, 2010). The major advantages associated with decreasing valuation of currency are: exports increase and imports decrease, which helps the trade balance and has an expansionary effect on the overall economy’s aggregate demand. With the devaluation of the euro, the products of countries whose currency is the euro become much cheaper for consumers whose currency is not the euro. For example, the cost of French wines and cheeses should be discounted by 13% over the last 6 months for US consumers. It has the reverse effect for US products that are imported by euro countries where costs have increased by 13% (it has a positive effect if you are planning to go to vacation in Europe). Countries that are selling products which countries outside the euro countries want have a major advantage over countries that are not.

One of the financial crises in Europe is the high debt ratios tied to government debt. PIGS and several eastern European countries have very high debt ratios (budget balance % of GDP) that are not sustainable in either the short or long term. This will increase their cost of debt servicing and their ability to pay off their debt. For example Greece’s 10 year government bond interest is 8.15% and Spain’s is 4.57% (Germany is 2.56%). Since these countries use the euro they cannot downgrade their own currency to pay off the debt in cheaper currency (inflate their way out of debt like the US). The only way they can decrease their debt ratio is by increasing revenue (taxes) and/or decreasing expenditures (for example increasing the retirement age, decreasing funding for programs, etc.). Debt ratios for the following countries (2010):

· Britain -12%

· Canada -4.3%

· China -3.1%

· France - 8.4%

· Germany -5.6%

· Greece - 10.2%

· Ireland - 8.0% (1/2009)

· Spain -9.9%

· United States -8.8%

Ireland is the only PIGS government that has made major cuts in spending and increased taxes. The Irish government in 2009 gave two substantial pay cuts to public sector employees totaling 22.5% and made budget cuts of 4 billion euro. They have increased their taxes by targeting the rich living overseas. This has helped Ireland reduce their 10 year government bond interest rate and contributed to the Ireland market index which has shown a gain over the last 6 months. Their current 10 year government bond is 5.11% (as of 6/21) as compared to Greece’s 8.15%.

Merchandise trade balances for the last 12 months ($ billion - April 2010) are the following:

· France -60.1

· Germany 211.9

· Greece -44.3

· Italy -9.6

· Netherlands -51.3

· Spain -68.8

· Britain -132.5

· US -546.4

· China 132.5

Germany has the highest merchandise trade balance in the world (over the last 12 months) and their balance will increase with the devaluation of the euro.

The following shows major EU stock indexes’ (January 18 to June 18, 2010) performance in euro/local currency: (For euro currency countries subtract another 13% to compare with USD. For example in US dollar valuation Spain’s decrease would have been -32%.)

· Ireland - ISEQ Overall index: .03%

· Germany - DAX index (30 companies): 6.62%

· France - CAC 40 index (40 companies): -7.87%

· UK - FTSE 100 index (100 companies): -4.63

· Spain- IBEX 25 (35 companies): -19%

· Italy- MIB30 (30 companies): -13.92%

· US - DOW index (30 companies): -2.62%

If I was going to invest in one European country’s Exchange Traded Fund (ETF) index it would be either Germany or Ireland. The Germany iShare ETF EWG tracks the MSCI Germany index. It has decreased 14.5% over the last 6 months. The expense ratio is .55% and bid / ask ratio is .95% (the fund has $1.2 billion in assets). It has a nice yield of 2.7%. The major problem with the index is that 19% of the fund assets are invested in the financial sectors and it has been reported by the German financial regulators that German banks’ troubled assets are at 800 billion euro (over 1 trillion in USD). Germany has a high saving rate that generated a lot of capital for German banks to invest. Since the banks had large capital surpluses they invested in a lot of high-risk areas like U.S. toxic assets, Spanish real estate and Irish hedge funds. The banks had debt to net worth of 52 to 1 at the start of the financial crisis as compared to the US of 12 to 1. Germany does however have the largest merchandise trade balance in the world and it should increase with the devaluation of the euro. The decrease in the valuation of the euro helped the companies in Germany to increase sales outside the euro countries.



There is one Ireland index ETF (Shares MSCI Ireland Capped Investable Market Index Fund – RIRL), introduced May 5, 2010 (it has already dropped 20% since its inception). It has only $3 million of assets which will have a high bid / ask ratio. The Irish government has done a very good job of decreasing expenditures and increasing revenues but this ETF does not have enough assets for me to make an investment (I will not invest until the fund has over $100 million in assets).

Vanguard has a very low cost (.16%) European index ETF: Vanguard European ETF (VGK). Since January 1, 2010 the performance is -15.72% (in the euro currency it would be around -3%). The fund has a very good yield of 4.67% and has over $11 billion invested which will reduce the bid / ask ratio.

If you think the euro will reverse its 13% devaluation over the next year in relation to the US dollar, VGK will get a 13% gain (because of the currency change). Personally I am invested in a number of ETFs that have invested outside the US. For example, International non-US market index – Vanguard FTSE All-World ex-U.S. ETF (VEU). VEU has 44% of their portfolio allocated to Europe. I will not at this time increase my exposure to Europe but will continue to monitor European countries. It can have a major affect on stock markets outside Europe (for example the Chinese and the US markets) with the devaluation of the euro, high debt ratios, banking problems, possible countries defaulting on their debt, social unrest caused by increasing the retirement age and decreasing social programs and other difficulties. When the financial minister of Hungary talked about his country’s possibility of future bankruptcy in a newspaper interview, it had a distinct affect on the stock markets around the world the same day; this shows clearly that financial systems around the world are very interrelated. The devaluation of the euro makes it more difficult for China, Japan, the US and other countries’ corporations to sell their product in Europe (because of the higher cost) which will reduce their revenues and profits (which should lower their stock price).

Please chime in with your comments on investing in Europe, how the euro will do in the next year, or anything else.

© 2010 Paul Cusick

401K Rollover

I was an employee of Sun Microsystems until June 2006 and retained my Sun 401K plan, which was managed by J.P. Morgan, until June 2, 2010. I decided to roll over my 401K to an IRA rollover account managed by Charles Schwab for the following reasons:

1) Sun’s 401K plan was transferring to the Oracle 401K managed by Fidelity. A “Blackout Period” would be in effect from June 15 to the week of July 5, 2010. In light of a very unstable market environment, financial crisis on-going in Europe and the unstable political environment in Korea, the Middle East, etc., I did not want to lose the ability to manage my account for at least three weeks.

2) I already have a large amount of assets in an IRA rollover account managed by Fidelity and I wanted to diversify my IRA investment companies.

3) I would have a lot more investment options with my IRA rollover account than the Oracle 401K account.

I closed out my Sun 401K account at the close of business June 2, 2010. I told the customer representative at J.P. Morgan to have the check written to Charles Schwab For the Benefit Of (FBO) myself. The check would be sent to me by way of Federal Express (I had to pay $25 to receive the check 5 days sooner than US mail). The DOW and S&P was 10,250 and 1,098 at the close of business June 2, 2010. I received the check sent via FedEx on Saturday, June 5 and I deposited the check at Charles Schwab Monday, June 7. Since the check was written to Charles Schwab I would have immediate access to the funds.

I have decided to invest my new IRA rollover in the following allocation strategy for the next 3 to 6 months except for the cash (with this allocation I will have participation in worldwide stock markets):

1) Cash (future investments) – 18%
2) US stock market index – 58%
3) International non US market index– 12%
4) Emerging market index – 12%

I will use the following Exchange Traded Funds (ETFs) (see blog - BRIC ETFs and ETFs vs Mutual Funds):

· US stock market index - Vanguard Total Stock Market ETF (VTI)

· International non US market index – Vanguard FTSE All-World ex-U.S. ETF (VEU)

· Emerging market index - Vanguard’s MSCI Emerging Markets ETF (VWO)



Vanguard is a very low cost provider of ETF and mutual funds (expense ratio) because of their cost-conscious investment techniques. This helps the bottom line performance of your investment. These ETFs are large by net assets value which will lower the bid / ask spreads (important when you sell the fund). They also have large trade volumes, which serves to keep the price of the ETF very close to the Net Asset Value (NAV) and give the ETF more liquidity. The following are the yields of the ETFs (as of June 12):

· Vanguard Total Stock Market ETF (VTI) - 2.03%

· Vanguard FTSE All-World ex-U.S. ETF (VEU) - 2.21%

· Vanguard’s MSCI Emerging Markets ETF (VWO) - 1.42%

As of today (June 13, 2010) this is a plan - I have not yet bought these ETFs. Please chime in with comments on when you think I should buy these ETFs or if I should consider a different allocation strategy.


© 2010 Paul Cusick

Paul

My Dad’s Financial Common Sense

I did not have a rich or poor dad. My dad was not rich in material goods. He didn’t have many assets (money), a formal education (he did get a high school GED when he was in his 40s) or a white collar job. My dad was, however, very well read, talked with anybody that he met, had very good common sense and street smarts. Dad told me a number of financial ‘rules’ when I was young that I did not understand until I got older. I wish I had understood these rules at a much younger age.

Financial rules of my Dad:

• You need money to make money. When I understood how the rule of 72 worked (http://www.moneychimp.com/features/rule72.htm) I understood why this was a very important financial lesson. This is how the rule of 72 works; if you have 7.2% rate of return on your investment you will double your money in 10 years (72 / rate of return = time it takes to double your investment). If your returns are 3.6% it will take 20 years to double your money. For example, if you have $1 million of investment capital and your rate of return is 7.2% you will have $2 million in ten years. It is very hard (or impossible) to save $100,000 per year for 10 years. This is why, when you start working, you want to start a program to save money so you will have investment capital in the future. To understand this rule is to understand the time value of money.

• In the depression some people still got rich. There are always ways to make money in any economic environment. A number of investors made large sums of money using credit default swaps when the housing bubble collapsed. There will always be ways to make money whatever the economic environment or financial crises. For example, if you think there will be high inflation and interest rates in the US, short medium and long duration US bond funds or US government treasure bonds. You don’t always need a growing stock market to make money. What you do need to do is to stay positive, and you may have to think outside the box to make money in a difficult economic environment or during financial crises.

• The only things money buys is freedom and the time and means to help others. When you have accumulated sufficient assets that you don’t need to work anymore you are free to do what you like to do and help others. You can continue to work at jobs that motivate and interest you or, if the job is no longer fun or interesting, you can quit at any time or find a new job. You can help others financially or use your time to help them. 

• You always need a nut (money).  You should always have an emergency fund in near cash assets (for example, money market funds, layer CDs, etc.) of at least 6 to 12 months of your monthly living expenses. For example, if your fixed and variable living expenses are $5,000 per month you should have at least $30,000 invested in near cash assets. I prefer to have 12 months of living expenses. This is very important if you lose your job and there is an economic downturn at the same time. You don’t want to sell assets that may have decreased in value or use your retirement savings to pay for your living expenses (which can be very costly in the long term). If you do not have emergency savings or liquid investments you could lose your house, automobile or other assets due to lack of ready cash.
 
• Money talks, bullsh*t walks.  It’s put up or shut up. You can talk all you want about wanting to buy a house, stock, automobile, etc., but at some point you need to have the cash to buy it. It’s great to talk to somebody about buying a house, but the person selling the house will deal with the person that has the most money with which to buy it. If you want something you need the cash to be able to purchase the asset.
 
• It’s only worth something if someone is willing to pay for it. Your house may have been worth $1,200,000 on zillow.com in 2007. If you are trying to sell your house today and somebody will only pay $900,000 for it, it’s worth $900,000 not $1,200.000. You could wait a very long time to sell your house at $1,200,000. If a stock price was $100 on January 15, 2010 and it is now selling for $35 it is worth $35, not $100. The asset’s value is only what somebody will pay for it, not what an ‘expert’ says it’s worth.
 
• Never fall in love before you purchase something. If you fall in love with something before you buy it you cannot make an unemotional decision. You lose all power to negotiate and you can’t walk away without buying it. If you’re able to walk away from a negotiation at any time, you have the upper hand. For example, ask yourself if you could get the asset cheaper if you waited two weeks, can you negotiate a decrease in the price (the world is a flea market), would a competitor charge less, etc. You need to view an asset from the standpoint of its actual, true value. An automobile’s value is that it is used for transportation, not picking up women.
 
• Never be forced to buy or sell something.  If you are forced to buy or sell an asset, you will lose your ability to negotiate - you'll have no ability to walk away from the deal.  Avoiding this situation requires planning and/or an emergency cash fund. Money (nut, emergency fund, etc.) buys you time. If you know that you are going to need $30,000 to pay for your kid’s college tuition in 9 months you should start planning on how you are going to pay for it today. You do not want it in risky investments that could lose a lot of value just before you need to convert it to cash; you may want to put it into a CD or money market today.
 
• If you want to buy something over $100.00 go home and sleep on it and see if you still want it the next day.  This was in the early 1970s - with inflation you may want to increase the amount to $300. This is a great way to save money and not buy goods on impulse. For example, you go bike shopping and you find a great bike that costs $1000. You take it out for a ride and you love the bike. Do you buy it now? No. You tell the salesperson you will be back tomorrow to buy the bike (he will give you a lot of reasons why you cannot walk out of the store). You start asking yourself questions, for example, do I really need a bike, can I get a used bike for less cost from craigslist or eBay, can I get it on-line for less and not pay sales tax, does it cost less at another store, can I negotiate the price, can I fit it into my budget, etc. This has saved me money over the last thirty years and I have not ended up with a lot of stuff that I did not really need.
 
These lessons that I learned from my dad should be taught to every high school/ secondary school student around the world. Some of them took me a long time to fully understand and incorporate into my financial planning. I have to admit, when I was in my teens and twenties, I didn’t always think my dad was such a smart guy. To young people now, I would offer this thought: sometimes your parents know more than you think - you may want to listen to their advice. It could come in handy down the road.

Please chime in with comments on any financial lessons that you learned in your lifetime.

© 2010 Paul Cusick
Paul