Sector Moves in Outlook III

I am initiating my bearish stance on the “Developed Markets” sector.

The UK, Eurozone, Japan, and even to a certain extent the US are increasingly subject to lower investor confidence in their ability to maintain a sound fiscal position. You can see this in various red flags such as their declining European and English currencies and increased borrowing costs for Greece, Portugal, Spain, and Italy.

For the Eurozone, there are concerns that banks have not written down toxic debt from the private sector as well as large holdings in fiscally irresponsible countries. If Greece chose to drop the Euro and initiate the Drachma (pointing to a devaluation), French banks would take enormous capital hits. This is just an example of how interconnected the financial markets are. One seemingly small issue could have catastrophic consequences for the region in general.

If countries embark on austerity programs to righten their fiscal ships, they would cut down on spending or raise taxes. Both would suppress economic activity and would likely result in a double dip recession.
For the UK, the political situation is uncertain and there have been numerous announcements towards cutting expenditures in order to maintain a more sound budget. However, the economic recovery may be derailed if such a policy is pursued. We may have the political coalition there split due to this dynamic. If indeed this occurs, the result could be the first instance of democratic governments failure to be able to adjust to a fast changing environment.

In the case of Japan, China is desperately trying to slam on the economic brakes as inflation has become troublesome and signs of a real estate bubble abound. If the Japanese economy does indeed get caught in a souring global trade environment, questions about its ability to repay its sovereign debt may surface as well.

The issue of debt continues to loom over sovereign states.
I am using the “Developed Markets”-“MSCI EAFE Index” as my benchmark to track my bearish stance.

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