5 ways to profit from the euro crisis
It's ugly out there in euroland, and I've positioned my portfolio to limit the damage if Europe's politicians find they can't blag or bully their way out of this self-inflicted crisis.
But there's every reason for investors to look for opportunities to profit, and I've picked out five suggestions below. I've based them on three pervasive features of the crisis: the three 'v's of volatility, vulnerability and value.
Volatility is what drives my first two opportunities.
I've been buying and selling shares whose prices have tracked the alternating 'risk on/risk off' sentiment of the markets, which have mostly reflected the latest developments in Europe. It's a strategy correctly described by Tony Loton on Fool.co.uk as swing trading.
Tony prefers to trade using spread betting as it has lower friction costs. My casual and simplistic approach is to increase my holding in a share when it's looking cheap after a piece of bad eurozone news, and reduce my holding after a piece of 'europhoria'.
2. Market platforms
If you don't fancy trading yourself, you can invest in the middle men who make money from traders. Spread betting firm IG Group saw much increased levels of customer activity in the six months to 30th November, with revenues up by a quarter. IG's shares have shot up in the last couple of weeks, but on a forward PE of 13 and yielding 4.6% they could still be a decent bet.
Alternatively, the London Stock Exchange is booming, with income up 20% and profits up nearly 80% in the last half year. Alan Oscroft on Fool.co.uk highlighted the Exchange had made money from lending to troubled Italian banks, proving that there are pockets of opportunities thrown up by the crisis for the fleet of foot to exploit. However, I'd be wary of the quality of profits to be had from Italian bank risk.
3. Cheap assets
And so to Value. One firm not shy about exploiting the euro crisis is Jacob Rothschild's investment trust RIT Capital Partners . The trust is actively seeking distressed assets, such as real estate, corporate credit and financial assets put on the market by troubled European banks.
RIT's net assets declined nearly 10% during the last half year but are up 170% over the past ten years. RIT is one of those 'buy and forget' shares that has been sitting in my portfolio for several years now.
RIT must surely not be the only investment manager with an eye for a bargain. The property sector especially should see some good deals, as banks across Europe queue up to sell distressed assets at any price to bolster their resources ahead of tighter capital requirements.
4. New customers
All problems, as they say, create opportunities. The vulnerability of companies in the eurozone presents a golden opportunity for UK companies to poach their customers.
Any company domiciled in a country that crashes out of the euro would suffer massive disruption. The distraction a forced and unplanned change of currency would create is almost unimaginable. But more, such companies would very likely lose access to credit, especially if they are mostly financed by domestic banks, and so they would be unable to supply customers' needs. Large companies would be affected through the impact on smaller, local companies in their supply chain.
British companies with competitors headquartered in the eurozone should be banging on the doors of their competitors' customers in Asia, the US, Latin America and elsewhere, and asking if they had anticipated the impact of euro break up -- and preaching the benefits of a sterling-based supplier.
I have no concrete examples, but I'd like to think British managers have the confidence to be doing this.
If the euro does blow up, then all fiat currencies will be vulnerable. A fiat currency is a fiat currency because its value derives from governmental decree. A forced departure from the euro would be a nasty reminder that governments' most solemn promises can be broken.
In those circumstances, gold would come into its own, though I must admit I have been bearish on the yellow metal. The gold price is well off its September high despite the world not being any safer now than it was then. That suggests to me the highs were a bubble and unlikely to be surpassed if the crisis gets no worse.
But gold should work as a hedge against a complete meltdown of the euro, rising in value if all else falls.
Seeking out volatility, vulnerability and value could throw up other opportunities for profit. Let us know if you have other ideas in the comment box below.