How to Invest during the Eurozone Debt Crisis

Investors are looking beyond the Eurozone to hedge their risk in light of a debt crisis within that economic region. They are doing this, and can do this, by repositioning capital into alternative investments. The Eurozone currently includes 17 member states within the European Union. These sovereign nations share the Euro as their single currency.

Although the Euro currency was designed to facilitate greater trade and economic activity, a few of the Eurozone nations known as PIIGS for Portugal, Ireland, Italy, Greece and Spain have very high amounts of debt. This large debt has caused bond investors and credit agencies alike to question the sustainability of such borrowing. The United Kingdom also has a large amount of debt, however at the moment it has a ‘AAA’ credit rating that indicates it has a higher capacity to manage the debt per Standard & Poor’s.

In light of the economic problem facing the Eurozone, investors have sought other ways to allocate their money. To illustrate, with weak economic performance currencies supported solely by their economies can devalue. Additionally, liquidity i.e. availability of capital funding, can increase, which can also lead to a lower currency value. This is what has been forecasted for the Euro according to Bloomberg, and can also cause capital flight to the dollar or other currencies thought to have more stability. One common investment that investors use to avoid or hedge against currency devaluation is gold and other precious metals because they have intrinsic value. It is a good idea to realize however, that commodities can become overinflated in value when speculative investing drives the price higher.

Another means by which investors are looking beyond the Eurozone is to steady their gaze on the BRIC nations or Brazil, Russia, India and China. Moreover, according to a New York Times interview with a Goldman Sachs asset manager, BRIC nations offer investment opportunities due to the level of growth these countries are experiencing. Moreover, investment in multi-national corporations with strong market positioning in these countries exposes investors to this growth and gives them an opportunity to take part in it. The BRIC nations are not the only nations with investment possibilities however. This is evident in research from Franklin Templeton Investments that indicates Indonesia also has low debt to GDP ratio or strong growth in proportion to national debt.

In addition to investing in multi-national corporations, investors can choose to hedge or avoid risk associated with the Eurozone by seeking bond yields from other issuer nations. Buying international bonds directly can be difficult and expensive according to Jeffrey R. Kosnett of Kiplinger magazine; however this does not mean individuals cannot invest in international bonds. This is because they can invest via bond funds. Furthermore, since bond funds are professionally managed wealth funds, they have greater access to bond markets, and have greater amounts of capital. When invested in non-Eurozone bonds, individuals can purchase shares of bond fund investments through U.S. Markets. For example, Businessweek lists several U.S. Exchanged bond funds with returns ranging from 5.6-20.8%.