Euro issues for SMSF investors to consider
There are two aspects of the European debt crisis that investors need to consider, according to Paul Taylor, head of Australian equities at Fidelity Worldwide Investment.
"The first is a crisis of confidence associated with the possible breakup of the European Union and the Euro as a currency," he said.
"From an investment perspective the key issue is that whatever happens, it would be a temporary dislocation.
"It is creating a crisis in confidence rather than creating any real and permanent negative impact on the global economy," Taylor said.
For Australia, Taylor said that the impacts from this crisis of confidence would primarily be focused on the dislocation of European and global debt markets.
"This could potentially impact Australian corporates with higher debt levels as well as Australian banks seeking wholesale funding," he said.
"However, currently Australian corporates have very low debt levels, and Australian banks have been reducing their dependence on wholesale funding due to the very strong growth in domestic term deposits and low levels of system credit growth.
"The negative impact from such a crisis of confidence would likely be very short-term in nature and, if anything, would create a short-term buying opportunity," Taylor said.
According to Taylor, the second aspect to be considered by investors is the global sovereign debt crisis. And Taylor added that that debt crisis included the debt issues of many European countries as well as the debt of many developed countries around the world, including the United States.
"Debt levels of many developed markets are too high and need to be brought down to more manageable levels over a prolonged period," he pointed out.
"This is a real issue and not just a crisis of confidence and will likely negatively impact global economic growth over a prolonged period.
"Due to the global sovereign debt crisis we are likely to experience a low growth world for at least the next several years," Taylor said.
However, Taylor was also quick to point out that the news was not all bad.
"Australia as a country is very well positioned for this low growth world," he said.
"The Australian Federal Government has very low debt levels and is projected to move back into a slight budget surplus as early as next year.
"Australian interest rates are also high by global standards, giving the monetary authorities - the Reserve Bank of Australia - ample ammunition to further stimulate the domestic economy should the global economy continue to falter," Taylor continued.
"And while we may be in a lower growth world for a prolonged period, we do not believe that all regions, countries, sectors and companies are low growth."
Indeed the reality, according to Taylor, is that there are some strong pockets of growth within this lower growth world.
"So this is the ideal environment for individual stock selection," he said.
"Markets are currently not differentiating between good and bad companies or high and low growth companies.
"[As a result], the Fidelity Australia Equities Fund is investing in high quality companies with strong balance sheets and either good growth prospects or a high and sustainable dividend yield," Taylor continued.
"And we believe that these companies will continue to outperform as they prove their growth and the sustainability of their dividends."
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