Europe Sharing Fiscal Risks Would Avert Crises, Imf Says

In Europe, focus on large caps and beware of banks, says Wells Fargo’s Christopher

Paul Christopher, chief international strategist at Wells Fargo Advisors, just returned from a sweeping European Grand Tour , and he says that while there may be more upside, investors need to tread with caution. First off, the European recovery is no great shakes . And its not clear that it wont fizzle out like recent returns to growth. In travels from Scandinavia to Turkey, Christopher found that managers at big multinational firms with exposure to global markets are justifiably upbeat. But the case for bullishness on mid- or small-cap firms who are focused on Europe is much harder to come by, he said in an interview with MarketWatch. The pan-European Stoxx 600 index /quotes/zigman/2380150 XX:SXXP is up 11.8% year-to-date versus a nearly 19% rise by the S&P 500 /quotes/zigman/3870025 SPX . Since the start of the third quarter, however, the European index has ralled 9.7% versus a 5.6% rise by the S&P 500. Christopher worries that Europes still-troubled banking sector has become overbought, a result of the global hunt for yield. While the risk of a European banking crisis is relatively low Christopher puts it at around 1-in-5 or 1-in-6 investors shouldnt devote more than 5% of their portfolio to the sector. As for investing in Europe overall, Christopher says the continent should be part of a broadly-diversified, developed market portfolio. The best way to overweight Europe, however, is by holding funds and ETFs focused on individual countries, he said, noting that Wells Fargo right now likes Germany and Belgium. William L.

To avoid a repeat of the debt crisis that led to bailouts from Ireland to Cyprus, the 17 nations that share the euro need to toughen rules enforcing fiscal discipline and set up fund transfers before crises develop, according to a report released today by the Washington-based funds staff. Although the first step to dealing with country-level fiscal problems must be larger national fiscal buffers, the size of shocks and their capacity to freeze up markets suggest a role for a zone-wide insurance mechanism, IMF economists wrote. Fiscal integration can be that mechanism. The most urgent task is to set up a backstop for banks, according to the report. After agreeing to build a banking union to help restore confidence in Europe s lenders, policy makers are now divided over a proposal to centralize control of failing institutions. While a fiscal union is a further step away, spelling out the measures to get there would help boost investors confidence, according to the report. To make such a plan viable, Europeans should agree to give up more sovereignty over their budgets, according to the paper. The euro area cannot afford a repeat of the imprudent fiscal and financial policies undertaken by some countries, the economists wrote. To ensure that the agreed fiscal rules are implemented, countries need to be provided with the proper incentives to comply, but also with a credible threat in case they do not. Discipline would enable them to pool resources toward an insurance fund or even a full-fledged euro-area budget, the economists suggested. Once thats in place, the euro-area could have its own debt instrument, staff suggested. That could help finance the temporary transfers to members facing shocks or even be a backstop to the banking union, they wrote. To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net More News: