Europe’s biggest and most successful economy might not seem the most obvious place to invest if you’re looking for high returns. After all, the country’s reputation for sobriety extends to its companies and public markets – traditionally you’re not going to make a lot of money by investing in them, but nor are you going to lose much either.
The fact that you’re not going to lose much is one of its greatest appeals as an investment location, especially because you might just make a small fortune on currency appreciation as a result of the euro crisis. Let’s assume – and it’s not such a big assumption – the political will to keep the present euro structure in place begins to wane. This is already happening. A socialist president has been elected in France, and austerity policies are being challenged increasingly throughout the southern European eurozone economies. All this is just going to undermine the increasingly fractured support among Europe’s political elite for the current currency arrangements.
One thing is for sure, there’s little economic rationale for the current euro set-up. Economies like Italy, Greece and Ireland would recover quicker with a flexible exchange rate, regardless of the initial shock they would have to endure by pulling their economies out of the currency bloc. Few economists disagree with this assumption. But, as they adopt new currencies, either some euro second-tier rate, or go back to local currencies, at the other side of the equation, stronger economies – like Germany – would have to adopt stronger currencies.
These stronger economies would have Germany at their heart, which would effectively create a Deutsche mark bloc, whatever it is called by the politicians. The currency appreciation of that new bloc could be as much as 30%, say those who have studied such things. So, there is your investment of the quarter – a long shot, but one where at least the downside is limited if it never happens. After all, investments in German government/corporate bonds and equities should be part of a well-diversified portfolio anyway. But just imagine the windfall if currency realignment does happen.
First published in CampdenFO, Issue 14