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.
Timing is tricky. Investors who go the safer European route may risk missing out on any potential upside that could come with continental stability.
Germany's five-year bond auction attracted bids for more than double the targeted amount Wednesday, supporting its status as the euro zone's safest haven. The German federal statistics office said the economy suffered a modest slowdown to 3 percent growth last year, from the 3.7 percent growth seen in 2010.
Some analysts expect tough sledding for Europe for now, and unforeseen downgrades and additional debt-market stress make predictions difficult. Low interest rates and other bailout efforts may begin to take hold later in 2012.
For U.S.-based investors, exchange-traded funds (ETFs) can be an efficient way to gain international investing exposure, although with risks. Here's a look at some leading ETFs that offer a play on non-euro Europe.
iShares MSCI United Kingdom Index Fund (EWU). With more than 100 securities in its mix, this fund has heavy exposure to energy, consumer staples, and financials. Top securities include Vodafone Group, HSBC, and BP. The fund has broadly outperformed the main proxy for euro-zone equity performance, iShares MSCI EMU Index Fund (EZU); EWU is down 9 percent over the past six months versus a 28 percent drop for EZU.
iShares MSCI Switzerland Index Fund (EWL). Three securities, Nestle, Novartis, and Roche Holdings make up close to 50 percent of this fund's total portfolio. Healthcare (30.9 percent), consumer staples (25.7 percent), and financials (17.3 percent) take up the top three spots, while energy and telecom take up the two smallest allocations in the fund. EWL is down 14.9 percent over the last six months.
Global X FTSE Norway 30 ETF (NORW). The fund tracks the FTSE Norway 30 Index and gives investors access to 30 of the largest firms that trade on the Oslo market. In terms of concentration, investors should note that energy dominates the portfolio, making up close to 40 percent of total assets, while financials (16.2 percent), and basic materials (12.2 percent) round out the top three. Clearly, the product is more tilted toward the commodity sectors than the others on the list and can be more exposed to global economic developments, Zacks notes.