Russell Napier: how you’ll know when it’s time to buy Europe

published 23 July 2012

European stocks look cheap, says financial historian and author Russell Napier. But it's not quite time to buy yet.

Europe's current focus on austerity is forcing a society that is over-borrowed in every possible way to deflate. That means falling wages, corporate sales, and asset prices.

This is a "monetary system that would in the end eradicate all corporate equity," says Napier a kind of stock market "doomsday machine".

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And that's partly why Napier is confident that, eventually, European policymakers will change tack. There are simply no examples of democracies that have worked their way out of a debt crisis without inflation, says Napier. It is just too painful.

"No society would ever opt to live with the consequences of this." So, politicians will eventually have to bend to the will of the people. Whether the European Central Bank prints money, or a national central bank that's been kicked out of the eurozone does so, the inflationary option will be embraced in time.

And when that happens, says Napier, European stocks will benefit.

There's another big issue that investors should be perhaps even more concerned about: China's relationship with the US. China's currency, the renminbi (RMB), is pegged to the US dollar. The Chinese have kept the RMB pegged to the dollar by selling it and buying dollar-denominated assets such as Treasuries.

Trouble is, the upward push on the RMB has fallen away as fears about the strength of the Chinese economy have grown. Indeed, the Chinese "haven't bought a single Treasury since April 16".

What could that mean? It might sound like "the stuff of cheap novels", but if the trend continues, China could end up being a seller of US Treasuries. And who would fund America's spending habit then?

For more from Napier including what he is investing in now check out Merryn Somerset Webb's interview with him in the current issue of MoneyWeek magazine (if you're not already a subscriber, you can subscribe to MoneyWeek magazine).

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.