Although the article tries to argue that a new form of pragmatism is taking hold that looks at firm- and sector-specific trends and valuations (which is good) rather than a narrow-minded focus on country risk (also good), the biggest risks to European companies remains politics and bad policy. There are not going to be gigantic shifts in pharmaceuticals or agro-processors in the next 12 months, but elections can be won and lost and taxes hiked precipitously. Given the fact that Europe isn't out of the woods yet, and that investors seem to be blinded by easy liquidity from the Fed and the ECB, ignoring the fragility of Ireland's recovery or the still-ballooning debt in Spain and Portugal is a recipe for disaster. Besides, as a recent paper noted, bad news tends to hit fairly quickly and shake up financial markets more than good news, so putting on the blinders due to country risk is just asking for prolonged and more severe shocks.
According to an article in FT.com, country risk is no longer on the minds of investors in European stocks. Indeed, judging by the investors and strategists they polled, it looks like a sectoral focus is now outweighing the country-focus which prevailed during the worst days of the Eurozone crisis (which, by the way, I agree with Kenneth Rogoff that the optimism about the end of the crisis is misplaced). Is this a good thing? Probably not.
Although the article tries to argue that a new form of pragmatism is taking hold that looks at firm- and sector-specific trends and valuations (which is good) rather than a narrow-minded focus on country risk (also good), the biggest risks to European companies remains politics and bad policy. There are not going to be gigantic shifts in pharmaceuticals or agro-processors in the next 12 months, but elections can be won and lost and taxes hiked precipitously. Given the fact that Europe isn't out of the woods yet, and that investors seem to be blinded by easy liquidity from the Fed and the ECB, ignoring the fragility of Ireland's recovery or the still-ballooning debt in Spain and Portugal is a recipe for disaster. Besides, as a recent paper noted, bad news tends to hit fairly quickly and shake up financial markets more than good news, so putting on the blinders due to country risk is just asking for prolonged and more severe shocks.
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AuthorDr. Christopher Hartwell is an institutional economist and President of CASE Warsaw. All commentary on this page is exclusively his own and in no way represents the views of CASE, his wife, his dog, or anyone else. Especially not his wife or his dog. Archives
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