Will Europe bring down the global economy?

March 6, 2012 Categories: Economic Insights
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For investors, 2012 is off to a good start. As of February 29, 2012, year-to-date equity returns are strong across the globe: In the U.S. the Russell 3000® Index is up 9.49%. Internationally, developed markets also rose with the Russell Developed ex-U.S. Large Cap Index up 11.6%. And leading the pack is emerging markets, where the Russell Emerging Markets Index is up 18.5%.

Yet even with these positive early results, clouds of uncertainty remain.1 Europe is still on many investors’ minds, leaving us to wonder when their debt crisis might rear its ugly head again. Unresolved issues in the Eurozone have led many investors to question the long-held belief that a globally diversified portfolio is the foundation of long-term investment success.

It can be difficult for clients to stick to their guns during times of stress, but as we have seen so often in the past, emotions and sentiment tend to betray us as investors. Sound, rational perspective should guide our investment decisions, not fear-charged perceptions.

These days it’s common to hear market pundits raging on TV, things like “Europe is going to crater and take the rest of the world down with it!” Will something like this actually happen? Probably not. But this kind of hype  provides great ratings — and fodder — for the networks.

Getting past the theatrics, Russell believes there is a high likelihood that Europe could enter a recession in 2012, if it hasn’t already. Does that mean it will be a recession of biblical proportions that takes the rest of the world with it? No, it doesn’t. Even though the global economy is becoming more tightly connected, trade between nations is becoming more diversified.2 No single economy is completely dependent on Europe – not even Europe’s own nations.

So, Russell believes that the impact of a recession in Europe can be absorbed within the overall growth of the global economy. And just as it is with every client portfolio, we believe global diversification is a good thing. And yes, that may include Europe.

1 Greek Economy Stuck in Deep Recession“, by The Associated Press, The New York Times, February 13, 2012.

Portugal’s Debt Efforts may be a Warning for Greece“, by Landon Thomas Jr., The New York Times, February 14, 2012.

2 World Economic Outlook: Slowing growth, rising risks“, International Monetary Fund, September 2011.

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Developed ex-U.S. Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding companies assigned to the U.S.

The Russell Emerging Markets Index measures the performance of the investable securities in emerging countries globally.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

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