With the current economic unrest in Europe, should investors steer clear of international investments?

With all of the problems facing the Euro-zone, it’s hard to construct a scenario in which the region avoids recession. Our belief at Bukaty Companies is that a mild recession in Europe may be priced into markets at this point, as it is a frequently discussed problem. If the European recession is mild, sovereign debt defaults are minimized and appropriate steps are taken to tackle the core of Europe’s problems, we see the U.S. domestic economy avoiding recession itself in 2012. While all of our investment strategies are currently under-weight to investments in Europe, we continue to add investments in other international markets as part of our objective to globally diversify our clients investment portfolios.

The European crisis highlights the major underlying flaw of the single currency Euro-zone; monetary union without fiscal union. Most Euro-zone member countries share a single currency and central banking authority, however, they all continue to tax, borrow, and spend on an individual basis. For example, we expect Germany will continue to manage their fiscal obligations in a sound manner, while Greece will continue to inappropriately handle their financial responsibilities.

We are optimistic over the progress that has been made recently in the European theatre as Central Banks have shown a willingness to work together in coordinated action to stem the risk of sovereign debt defaults and bank failures. The European Central Bank announced at the end of December that it will help support European financial institutions by extending loans to distressed banks and those with high levels of exposure to sovereign debt that are at risk of default. This was an essential decision as a major European bank failure could generate a negative domino effect akin to what we witnessed after the collapse of Lehman brothers in 2008. While we do not see a worse-case scenario for Europe materializing the structural challenges facing the euro-zone economic community are quite daunting. These economic headwinds in Europe warrant carefully consideration before making investments in the region. Investing globally is a part of any well-diversified investment portfolio, however with the current problems facing the euro-zone the prudent investment decision is to look elsewhere for international opportunities.

Prepared by James Battmer Chief Economist & Portfolio Manager @ Bukaty Companies