SO we’re up and running. 2012 is fully underway and here I am with the same question I had in January last year. We’ve always presumed that whatever happens to the Eurozone, one way or another Northern Europe – specifically Germany – would eventually have to pay for it. What’s never been clearly answered is exactly how and when.
And that’s despite over 40 different meetings between heads of state, finance ministers, the G8 and the G20 in the last 12 months.
About the only thing I can be fully confident of is that we’re going to get a lot more meetings, kicking off with another Merkozy get-together this week, that fail to get us any closer to definitive solutions.
In addition, German policy seems to have been designed to put off paying for anything as long as humanly possible. Angela Merkel talks of a 10-year period of adjustment. It took a decade of wage suppression and painful adjustment to fully absorb the former German Democratic Republic. Merkel believes southern states must go through this before we can consider an ultimate answer, be it “Fiskal” union or debt pooling.
And it was with this thought that something occurred to me at Christmas while watching a rerun of Shaun of the Dead, the comic zombie movie with Simon Pegg. At the end Pegg’s character is about the only human left, but living quite happily with him at the bottom of the garden is Nick Frost’s character – his best mate who is now a zombie. And that’s the Eurozone debt crisis. It’s neither fully dead nor alive. We can’t kill it with a break-up nor can we solve it. We just have to live with it and deal with the implications – continuous lower growth, higher unemployment, banks on life support, more taxes, constricted credit, underinvestment and central bank action.
For investors, our zombie friend means more uncertainty and volatility. Last year the best two performers out of the STOXX 600 were both tobacco – BAT and Imperial. With steady earnings, some equity market growth, high cash generation and a well covered dividend, they represented the exact opposite of the overall economic environment. Many believe you could do worse than investments like this again in 2012.
Gilts returned over 17 per cent. Many think yields can go even lower from the record 1.96 per cent hit two weeks ago. As Eric Wand of Lloyds Bank puts it, “in an ugly contest, gilts are relatively attractive.” They have gained from the problems in Europe. If the zombification of the continent persists, gilts may well continue to benefit.
Ross Westgate co-hosts Worldwide Exchange daily on CNBC and also anchors Strictly Money -- www.cnbc.com