The debt crisis in Europe has certainly received much media attention over the past year. In our clients meetings, we have seen that many of you have a strong sense of pessimism about the economic future, in particular what will happen with the European economy. One question I have often heard is "why would we continue to invest in European stocks when there seems to be no way that the European economies will grow in the foreseeable future?"
Our answer to this has been that we feel it is extremely important to remain fully diversified. European stock markets already declined sharply in the third quarter of 2011, making their stock prices relatively attractive at the present time. Also, Europe is still home to many innovative and profitable companies (think Mercedes). We also believe that the future is not as clear-cut as some may believe. How Europe emerges from the debt crisis is a very complex issue, particularly in the context of the interconnected global economy that we live in.
This article appeared in this morning's Wall Street Journal, Europe's Supply-Side Revolution. It is well worth reading and provides a different perspective on how the future may play out. The authors believe that "The transformation of Europe is being made possible—as serious reform is everywhere and always—by crisis."
We have no way of knowing if the path of the European economies will be that that of recovery and strength or malaise and weakness. We believe strongly that we should not invest in a way that implies that we know the answer to this problem. Instead, we should as always remain prudent and well diversified, with our eyes on reasonable long-term returns.