Surprisingly, the biggest risk to the value of your equity holdings over time may not be the talkative U.S. Federal Reserve.
Instead, it may the future of the eurozone. At least that was what I came away with following an extensive talk with former Bank of England Governor Mervyn King on Monday. King, in New York to discuss his meaty new book "The End of Alchemy: Money, Banking, and the Future of the Global Economy" pulled no punches with respect to the long-term outlook for the eurozone. When asked how CEOs of large U.S. multinationals should be thinking about the EU, King offered a frank assessment:
"I think there are serious risks to the eurozone because if you were thinking of an investment decision whether it's there, or here, to export goods into the euro area you would need to have some feel for what the real exchange rates would be over the next five, ten, fifteen years. I think there is enormous uncertainty about that because fixing nominal exchange rates has created deep recessions in the southern parts of Europe and it's not at all clear how sustainable this is going to be -- if Germany leaves the eurozone, you would expect the new Deutsche Mark to be much stronger than the euro and if others leave, they might have much weaker currencies."
King didn't exactly sound too confident on there not being a "Brexit" later this year (which may push up the currency's value). Nor was he particularly keen on Germany being in the eurozone any longer.
Talk about unsettling from a worldly perspective. If I am the CEO of Action Alerts PLUS holding Starbucks (SBUX), Wal-Mart (WMT), Caterpillar (CAT), Coca-Cola (KO) or another large multinational this lack of stability in the EU poses serious risks to business in the short run, but also returns on investment in the long run. Personally, I don't think execs at many of the largest companies are thinking deeply on eurozone risk because of an ingrained "short-ism" in management styles and nature more broadly.
From an investor standpoint, one has to question how best in breed a company such as Starbucks is if its eurozone assets could go up in smoke should Germany leave the experiment.
For good measure, King added, "I think developments outside the U.S. and the rest of the world are certainly troubling, such as in China and in particular, the euro area."
King's visit prompted me to reconnect with macro trends in the eurozone. It's not that I don't watch developments there, it just takes a backseat to all of the ridiculousness that tends to emanate daily from the U.S. markets and news cycle. I suggest you undertake a similar reconnection, studying the European asset bases of companies you may own.
While recent actions by European Central Bank President Draghi soothed markets, I don't think they got to the root cause of sluggish demand in the currency bloc. Countries in the south remain mired in nasty recessions, and more efforts in public works programs have to be taken to help diminish those recessions (the problem is countries don't have the balance sheets to undertake such programs).
If I learned anything from King in our time together, it's to truly question policymakers continuing to slash interest rates to nothing and promoting QE to spur growth. It's not working, and risks to growth remain severe. Some of these concerns were recently aired in a new note to clients from J.P. Morgan and in comments by a key ECB official.
"ECB action is behind us, euro strengthening is a problem, relative valuations are unexciting and the region is a consensus [overweight]," said J.P. Morgan analysts. Here come the downgrades on equities with outsized EU exposure from J.P. Morgan.
Meantime, ECB Executive Board member Benoît Coeuré uttered on Monday, "the ECB cannot single-handedly create the conditions for a sustainable recovery in growth -- this requires a concerted effort in terms of economic and fiscal policies." He added, "ambitious reforms are still needed in most of the euro area economies, given the low growth potential and high structural unemployment."
I can't blame this group of folks for the more cautious stance on the eurozone. The latest reads on growth have been unspectacular. Eurozone consumer confidence weakened for the third straight month in March, according to the European Commission. Retail sales in the U.K. increased a mere 0.1% on a like-for-like basis in February from the prior year, a marked slowdown from the 2.6% rise notched in January.