Investment protection from Europe's misery

By Daniel Wagner

Associated Press

Published: Friday, June 8 2012 12:00 a.m. MDT

WASHINGTON — Europe, a thundercloud over financial markets for three years, might burst this month into a downpour. For investors who want to stay dry, some shelters look sturdier than others.

Junk bonds, companies that make consumer products and even some European stocks could add a healthy shot of profit to well-designed portfolios, analysts and traders say.

For the third straight spring, fear about Europe's debt crisis has rattled U.S. stocks. Investors are increasingly worried that Greece will exit the euro, and Spain might need an international bailout.

The next date to watch is June 17, when Greece holds an election. If the far-left party wins, Greece may spurn the program of bailouts and steep budget cuts that has kept it afloat.

Global markets would probably whip and dive if that happens. But if the worst fears don't materialize, global markets will probably see a short-term "relief rally."

The trouble is that nobody knows how the European crisis will unfold. So investors need diverse portfolios that won't crumble if things get ugly — or miss the updraft if Europe simmers down.

David Kelly, chief global strategist at JPMorgan Funds, says it makes sense to tilt your portfolio slightly toward investments valued in U.S. dollars — stocks and bonds issued by U.S. companies — because U.S. markets are likely to remain more stable.

In uncertain times, a company's products matter. The more necessary the product, the better its producer can weather a typical economic downturn, says Jerry Webman, chief economist at OppenheimerFunds, an asset management firm.

"People are still going to brush their teeth, even if the economy gets into difficulty," Webman says. He likes companies that make boring yet necessary products like food, dustpans and dental floss.

The exception: any company that depends on exports to Europe for a big chunk of its revenue. Analysts say investors should review companies' financial statements to find out which rely heavily on European consumers. Those are the people who would cut back on spending if the crisis deteriorated.

"People want to be cautious about anybody who's exporting to Europe, and look for some opportunities among companies that are exporting to other parts of the world," Webman says.

For example, cosmetics maker Avon Products generated 28 percent of its revenue from Europe, the Middle East and Africa last year. Estee Lauder generated 37 percent of its sales in that region.

That might make Avon a better bet, experts say, because it appears to be less dependent on spending by European consumers. Estee Lauder acknowledged the threat of European "softening" in its latest quarterly financial report.

The same logic applies to European companies that depend on exports. In the world of multinationals, it matters less where a company is based than where its customers are, says Peter Tchir, manager of the hedge fund TF Market Advisors.

He points to two multinational food companies: Nestle, based in Switzerland, and Kraft, based in Northfield, Ill.

"Their businesses are a lot more similar than people realize," Tchir says. "What you really should do, across the board, is look at European companies that are as global as U.S. companies, but where the stock has sold off significantly."

Kraft's stock is up 82 percent since its financial crisis low in 2009. Nestle, which trades on a Swiss exchange, has recovered only 55 percent from its 2009 low, in part because of instability in European financial markets. Given the companies' similarities, that might make Nestle a better bargain for investors, Tchir said.

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