How to take cover as Europe implodes

I have a friend who has recently discovered day trading. She looks for the biggest fallers in the stock market over a month, checks that the shares that have fallen more than 50% (of which there are always a few) aren’t going bankrupt right away, and buys them. Then she waits for them to go up and sells them. Last week she made 60%. She says it is fool-proof.

I’m wondering how she knows something isn’t going to go bankrupt right away. I’m also thinking that if she does have a special method of doing so – and if risk makes her happy – I might introduce her to the sovereign bond markets.

OK, so most government bonds aren’t up and down by 50% in a day. But, given the downgrades to Greece, Portugal and Spain last week, and the rumours swirling around them, it is surely only a matter of time. The eurozone has morphed into a gamblers’ heaven.

So that’s my friend’s summer taken care of. But what should the more cautious among us be doing as Europe implodes?

First, in spite of our ludicrously large deficit (it is within a statistical irrelevance of Greece’s), I don’t think you need to be too down on sterling immediately. Clearly, other currencies have bigger problems than ours, and the last few weeks have shown that there is a weird chance that the UK will be, in the short term at least, a safe haven for European investors.

More on the eurozone’s woes

Why the euro is destined to crack up

Why Greece could trigger another financial meltdown

Not only has the yield on gilts fallen as international investors have fled Greece, but I’m also hearing that high-end estate agents are full of stories of Greek and Italian investors buying any prime London property they can get their hands on in cash – and fast.

Last month, £1 would have bought you €1.11. By the end of last week it would have bought you €1.16. So that’s nice – for those heading to Europe on holiday, at least.

It is also entirely possible that none of our would-be leaders is as gormless as they would like you to think about cutting the UK’s budget deficit and national debt. I’d put a reasonable sum on any new government having worked out which slash-and-burn policies they are able to enact quickly: better, surely, to be loathed by public-sector workers next year than to be clearing office space for the IMF the year after.

That said, if you don’t see the slash-and-burn coming within weeks of the election, you might want to move spare cash out of pounds. The markets are watching us.

Next, you move any money you might still have in euros out of euros. There is, as Christopher Wood of CLSA puts it, “a monster bailout” coming for Greece. That will be a “fundamental game changer for euroland”, in that the credibility of the euro as a disciplined monetary regime will have been comprehensively shattered. The euro has had a nasty few weeks but even now it still doesn’t fully reflect this. Any bounce on a bailout and we should probably get out.

What else? You hang on to shares in global companies with international franchises and pricing power – any based in Europe will do well from falls in their currency.

Then, you look to some of Asia’s currencies for diversification. I wrote in December that I’d be happy to hold US dollars (that has worked out fine) but that I’d be even happier to hold some of the Asian currencies that are in various ways pegged to the US dollar – Hong Kong or Singapore dollars, perhaps.

Why? Because as Asian growth continues to trump that of the US, it gets hard for Asia’s exporters to both keep exporting in volume and to keep importing the US’s loose monetary policy. The average Asian exporter doesn’t necessarily want its currency to strengthen in a hurry, particularly if China isn’t going to allow it to do so – exporting is a competition and a strong currency effectively raises your prices abroad. On the other hand, the average Asian exporter can’t afford to let inflation let rip, either. That’s why Singapore has just allowed its exchange rate to appreciate a little against the US dollar – it is now at a five-year high against the American currency and one day it won’t be pegged to it at all. I’d take it over the euro any day.

And, finally, you hold gold. On Wednesday, as everything else fell sharply (which was odd given that the Greek crisis hardly came out of nowhere), gold rose by $25. I still see gold as insurance: it goes up when things go wrong. The worst thing that could happen to the gold price would be everything going right: the Greek crisis being resolved as all state workers happily accept a 30% pay cut and German voters agree to pay their pensions; global inflation being contained at 2-3%; the world’s big banks accepting that they should be divided into utilities and casinos without a fight; and budget deficits across the world being rendered irrelevant by healthy economic growth. All that might happen. But I’m still going to keep holding gold – both in its physical form and via exchange-traded funds.

• This article was first published in the Financial Times

  • Mike, Spain

    My own thoughts on the Euro are that there is too much Politics, too many people and too much reliance by US and Asia for it to fail.

    The indebtedness however is another matter. If we could take Politics out of the management of the country/s we would have more respect.

    Hmm I would like to take out some government treasury stock for safety. which governement do you suggest and how do i do it in a foriegn country??

  • Paul, UK

    It seems to me there are 3 possible things Europe can do with it’s debts:
    1. Reduce borrowing
    2. (Hyper)Inflate it away or
    3. Default

    With the levels of debt that exist in both Europe and the USA it seems to me that some form of default looms large.
    Any attempt to reduce borrowing would cause certain civil unrest and given Europe’s history in the last 100 years this could not allowed to happen.
    The level of inflation required to erode the debt would presumably cause similar unrest.

    That just leaves default – pressing the reset button. For those with a strong sense of self preservation gold seems the sensible option along with the currencies mentioned in the article.

  • Alan G.C.

    Well, I did right by leaving it to the last minute to get my holiday euros.
    I managed to get a better rate but I will leave with a heavy heart because of the indecisive election result.

    What this country needed above all else was stability and certainty.
    We aren’t going to get it are we? Now we are going to have wheeling and dealing for power while nothing gets done!