What to Buy if Europe Actually Gets its Act Together

Most believe that an agreed-upon plan for the Eurozone will not go far enough to increase economic growth in the region. And nearly everyone expects Greece to “officially” default. What’s more, if tighten-the-belt austerity doesn’t sit well with disenchanted Greek workers, how will it sit in the stomachs of 2-hour, lunch-breaking Italian employees?

“Oh Gary,” you say, shaking your head. “Pray tell, sir, your reason for raising this sea-storm on a day when the Dow surges 270+ points!”

Simply put, the quagmire in Europe is likely to go through several more fits and starts before market confidence can genuinely return. Unless Germany, Austria, Belgium and the Netherlands tow more than their fair share of regional expansion  — unless those same countries pay for the financial mistakes of their neighbors (Portugal, Italy, Greece, Spain) – the world may pay dearly for a pan-European recession.

Actually, at this point, it’s not a recession that investors need to worry about. European stocks and emerging market stocks have already fallen enough to “price in” economic contraction in Europe. Unfortunately, risk assets have not quite priced in an unmitigated failure to recapitalize European banks.

It follows that ETF traders are the only ones who can ignore the madness of market-based securities today. ETF investors, however… they are forced to wait.

What if, however, in a startling display of solidarity, Europe gets its act together? What if the effort to shore up financial institutions is so remarkable, a Greek default becomes a mere pin prick to bondholders while, simultaneously, borrowing costs for Portugal, Italy and Spain come down dramatically?

In my estimation, if Europe gets its act together, you’ll still see some austerity-linked pain in Spain and Italy. Yet one would have every reason to expect big things out of the multinationals in Germany, Austria and the Netherlands. Not only do these countries represent the faster-growing developed economies in the Eurozone, but their respective exchange-traded funds have gained consistent ground whenever the drama in Greece settles.

Should European leaders surprise the world with an extraordinary display of coordinated action, natural resource companies and resource-rich emerging markets like South Africa and Chile would also be compelling. Indeed, some of the best performers on Monday’s “Root For Europe” trading session included materials-heavy ETFs.

ETFs With Potential For Capital Appreciation On A European Surprise
						Monday % Gain
iShares MSCI South Africa (EZA)						3.72%
iShares MSCI Germany (EWG)						3.61%
iShares MSCI Netherlands (EWN)						3.51%
SPDR Select Materials (XLB)						3.21%
iShares MSCI Austria (EWO)						3.01%