While the investor sentiment continues to be bullish and remains at its highest levels since March 2011, I’m also aware of the potential hazards ahead for stocks.
Last week, optimism surfaced on news that Greece had or was close to a debt swap deal, yet then the country’s 16 eurozone members demanded more concessions to sign off on the deal. This is now where we are—no deal. The problem is that Greece is extremely fragile and the other countries in the eurozone want to make sure this will be the final tranche of emergency capital forwarded to Greece. The countries are simply tired of Greece and the past decision to significantly increase the size of the government and payroll.
With Greece in a recession for the past three years and little hope, the country needs to deliver a sound and realistic plan to cut costs including its massive debt of $330 billion euros. The problem is that the country’s tough austerity measures, while necessary, will also make it very difficult for Greece to expand and grow its extremely fragile economy. It could take decades before the country can get out of its crisis mode. Just take a look at Japan, which has been caught in its mini recessions and stagnant growth for over 20 years.
In addition to Greece, I’m still sensing that there will be more problems down the road in the other PIIGS countries: Portugal, Ireland, Italy, and Spain. Germany may fall into a mild recession in the first quarter and it’s the strongest country in Europe, so the risk on the smaller eurozone countries is extremely high and subject to potential further weakness. There are over 500 million people in Europe, so it’s a critical region. In Europe, retail sales contracted in January and there’s speculation that the eurozone could be heading for a recession.
China is also showing some signs of stalling largely due to the muted growth in the eurozone and, until this is corrected, issues could arise. The International Monetary Fund suggests that a recession in Europe could cut China’s GDP growth in half this year from the current 8.2% estimate.
So, while traders are focused on economic renewal and job creation in the U.S., the eurozone region remains a high risk area vulnerable to continued stalling. Before the global economies move into sustained recovery, the eurozone must expand and rebound. Even if the U.S. economy strengthens, we need to see demand growth out of Europe in order to feel more confident in the sustainability of growth in the U.S. and elsewhere.
While China could be impacted negatively by another recession in Europe, I continue to rate the country a top area for growth investors, which I discussed in China: On the Offensive Again.