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The insider's guide to the crisis

European stock markets have ridden a roller-coaster this year as Ireland followed Greece into financial distress. After the Emerald Isle became the second European Union country to get a bailout, speculation is growing that the contagion will spread to Portugal and Spain. Given the gathering clouds, Shirley Won asked European fund managers about their outlook for the troubled region, and where they are investing

Markus Koebler

Manager of Altamira

European Equity

Europe's sovereign-debt woes are not going away soon even though Greece and now Ireland have succeeded in getting bailouts, says Mr. Koebler of Natcan Investment Management. "The market decided to ignore the problem for six months [after the Greek crisis], but we knew there was a lingering problem ... This crisis will take years to melt away because governments have accumulated huge deficits and it will take time for them ... to take their debt down to sustainable levels."

Since the start of the global financial crisis in 2008, the manager has been underweight the financial sector compared with the MSCI Europe Index. "We didn't jump back into financials early this year when people thought the crisis was over around June or July," he said. "We have zero exposure to Ireland and Greece."

While he does own British-based Standard Chartered PLC, it is because 95 per cent of that bank's business comes from Asia. Most of his holdings have a global focus. He likes German luxury car maker Bayerische Motoren Werke AG (BMW) because it will benefit from growing Chinese demand. Swiss-based Nestlé SA, the consumer goods company, and Denmark-based Novo Nordisk, maker of insulin to treat diabetes, are gaining traction in emerging markets, he added.

Chuk Wong

Manager of

Dynamic European Value

The European debt crisis is not as worrisome as it was six months ago when Greece needed a rescue package and the future of the euro was also in doubt, contends Mr. Wong of Goodman & Co. Investment Counsel Ltd. "The last experiences [with Greece and Ireland] have shown the continent has the determination and resources to address the debt problem ... The situation is manageable."

The Irish problem is "another aftershock of the global financial crisis of 2008, and typically, aftershocks get less severe," he said. "Europe has macro problems and challenges, but fortunately we are stock pickers, and Europe is a stock pickers' paradise." Many European stocks trade at a discount to their global peers as investors stay away because of concerns over the debt crisis, he added.

Mr. Wong is finding bargains among smaller players as opposed to big blue chips. He likes Austrian-based Vienna International Airport, which offers short transit times for connecting flights, and Norwegian offshore service rigs operator Prosafe SE. Late last year, he also bought British-based Lloyds Banking Group PLC. "It's a turnaround story," he said. "The bank has completed its capital restructuring and is improving profitability."

Ian Scullion

Manager of CIBC

European Equity

Ireland's debt woes have wreaked havoc on European markets recently, but the "Irish crisis is not a big thing if you look at the overall [global credit] crisis in the past two to three years," says Mr. Scullion, a manager with CIBC Global Asset Management Inc. "This crisis is just a continuation of what has been happening since 2007. Until then, banks, financials and consumer discretionary [stocks] had benefited big time from this huge liquidity and low interest rate environment."

After he realized that a "huge risk" was building in some European banks, Mr. Scullion cut his exposure to financials in 2008 by half to about 12 per cent from a year earlier. "We are now at 14 or 15 per cent, but it has been the markets bringing them up from their lows," he said. "The banks we own are very well diversified across the world with their business in three, four or five countries."

Likewise, most non-financials in the fund have a "global footprint," he said. French-based LVMH Moët Hennessy Louis Vuitton SA, a luxury good maker, has been growing, especially in China, he said. Germany-based Fresenius AG , the world's largest provider of kidney dialysis, and French-based Air Liquide, a supplier of industrial gases which operates in more than 75 countries, are also names he likes.

Paul Musson

Manager of Mackenzie IvY

European Class

Europe's debt crisis casts doubts over the continent's economic recovery, says Mr. Musson, a manager with Mackenzie Financial Corp. "We think it is reasonable to assume that economic growth in the developing countries of Europe will be slower over the next number of years."

Solving debt issues takes time, and will be "painful," he warned. "Sovereigns have taken on all this debt to bail out the financial industry, and put it on the taxpayer ... But balance sheets are getting stretched at a time when populations in Europe are aging, and are going to rely more on social benefits."

Mr. Musson has not owned a bank since 2003 after becoming concerned about the reckless spending and derivatives building up on the balance sheet in the financial sector. "Sometimes you have to stay on the sidelines for ... years to wait for your opportunity," he said.

His fund is positioned defensively with 20 per cent in cash and a lot of consumer companies with strong balance sheets and a competitive advantage. They include Nestlé, French food-products conglomerate Groupe Danone, Belgian-based discount food retailer Colruyt SA and British-based global consumer products firm Reckitt Benckiser Group PLC.

© 2007 The Globe and Mail. All rights reserved.

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