A Long Opportunity Amidst the European Fiasco

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The European political establishment will likely broker a deal that requiresEurope's stronger economies to act as guarantors for the weaker economies. In exchange, the countries currently in turmoil will be expected to implement structural changes to their economies and enact sound longer-term financial policies. In order for such a regime to be successful, the EU may need to create a central authority that will guide these countries toward implementing these new policies.

The European political process can move at a glacial pace, often getting sidetracked due to market developments and social forces. Given such obstacles, the EU may not move quickly with these reforms until after conditions deteriorate further and the market forces it to act.

Additionally, equity investors are also contending with the massive shift of money from stocks to bonds. Although fearful investors can drive stocks down in the short term, the market's worst fears rarely materialize and savvy investors use these opportunities to pick up stocks at bargain prices.

Although I expect the EU will ultimately arrive at a solution to its debt crisis, it is possible that the political process could fail. In addition, a full-fledged recession could also be on the horizon. See Jim Fink's article, Italy's Debt is Downgraded:The Euro is on the Verge of Collapse , for more on the European debt situation. In either case, the markets could renew their descent.

However, as Benjamin Shepherd uncovers in his article, Dollars to Deutsche Marks ,Europe does offer low valuations and solid dividend yields. And from a contrarian standpoint, it's often profitable to invest when market sentiment is at pessimistic extremes.

Meanwhile,France is in the process of reducing its total deficit to 5.7 percent of gross domestic product ( GDP ) in 2011 from 7.1 percent of GDP in 2010. The country's leadership also plans to further reduce its deficit to 4.6 percent in 2012 and 3 percent in 2013.

To achieve these deficit reductions,France will reform its tax code by cutting deductions and eliminating loopholes. French companies will face an increase in the corporate tax rate, while wealthy individuals could also face higher tax rates.

At the same time, the government will keep spending cuts modest to avoid social unrest. But after the 2012 elections are completed, the French government may make further spending cuts becauseFrance has one of the highest spending-to-GDP ratios in the eurozone.

Nevertheless,France's economy performed strongly in the first half of the year, which should allow for full-year GDP growth of a little less than 2 percent. I expect a similar performance next year.

Investors should consider going long iShares MSCI France Index Fund( EWQ ) during periods of weakness. The ETF offers solid growth potential with its portfolio of resource- and infrastructure-related companies. The fund boasts a dividend yield of 3.5 percent, a result of its exposure to pharmaceutical and telecommunications names. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Article Republished with permission from <a href="http://www.KCIinvesting.com" rel="nofollow">www.KCIinvesting.com</a> and <a href="http://www.rukeyser.com" rel="nofollow">www.rukeyser.com</a>


This article appears in: Investing , Stocks

Referenced Stocks: EWQ , GDP

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