Euro-zone officials, with global central bank help, may have patched the region's vulnerable financial system for now, but borrowing costs remain steep in Italy, Spain, and elsewhere. A heavy and expensive debt load brings added risk to the shared-currency bloc. As a result, many investors have opted to look beyond the "zone" for exposure to developed Europe.
The short list includes heavy-hitters the United Kingdom and Switzerland and extends to Scandinavian nations.
[See Where to Invest in 2012.]
"While the pickings are certainly slim, a number of stalwarts have resisted the temptation to join the bloc in years past and are now likely glad that they dodged this bullet," say analysts at Zacks Investment Research, in a commentary. "Generally speaking, these countries have managed to skirt by most of the issues that many of their euro brethren have experienced over the past few years and have seen better performances out of their stock markets thanks to this lower level of currency risk."
Of course, risks for part of Europe spell risks for all of Europe. Shared currency or not, the U.K. and the entire continent are economically linked through trade. Developed nations' banks have plenty of exposure to debt and asset markets throughout the bloc. But the fact that currency "indies" have greater central bank and policy flexibility at their fingertips soothes investors. Non-euro nations are also maintaining higher credit ratings.
There are certainly non-euro areas that look just as volatile, if not more skittish, than the shared-currency bloc. Protesters gathered in Hungary around the start of 2012 to denounce the country's new constitution, which went into effect at the first of the year. New reforms include a law that curbs the power of its central bank. Hungary's currency, the forint, is down some 30 percent since 2008 and its export presence (exports benefit from a weaker currency) isn't strong enough to offset the impact of weaker domestic spending. High debt levels have hobbled Hungary's economy and it may have trouble securing euro-zone and International Monetary Fund financial support.
Economic independence has its downside, too, and investors should vet "emerging" Europe just as they would any riskier emerging market. The intimate relationship on the continent is revealed in the recent suffering of Austria's ETF, the iShares MSCI Austria Index Fund (EWO), which shed some 40 percent in 2011. Austria has significant financial exposure to Hungary, the Zacks analysts say.
U.K. chugs along. Losses have been much less pronounced for developed non-euro nations, especially the U.K. There, GDP is expected to grow at a 1 percent clip for 2012, on pace with Germany and France, below the 2 percent rate expected for the United States and a 9 percent gain for China, according to analysts at PricewaterhouseCoopers.
Trevor Greetham, portfolio manager of the U.K. Fidelity's Multi Asset Funds, is defensively postured around Europe and global markets, recalling the U.S. credit crisis in 2008. "We have been selling equities and commodities to maintain the deep underweight positions we first established in August," he says. "Within equities, we are underweight Europe. We favor U.K. and German government bonds, U.S. and Swiss equities, defensive sectors, and the U.S. dollar."
Steady Switzerland isn't without its problems. The Swiss franc firmed in early January after Swiss National Bank Chairman Philipp Hildebrand resigned amid a scandal involving a controversial currency trade by his wife. The franc rose on concerns that with Hildebrand's resignation, the Swiss National Bank would be hard-pressed to keep its peg against the euro, which could drive the currency higher. That's a negative factor for its pharmaceutical, luxury retail, and other exports.