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Where To Hide From The EU Debt Bomb

11/01/2011 @ 4:56PM

http://www.forbes.com/sites/kenrapoza/2011/11/01/where-to-hide-from-the-eu-debt-bomb/?partner=yahootix

The European debt crisis continues with its one and a half year tradition of two steps forward, three steps back. Where are money managers putting their clients money to preserve capital?

David Donabedian, chief investment officer of Invesco’s private wealth management firm Atlantic Trust, says they sold off all of their European equity exposure over the summer and bought large cap U.S. dividend stocks. “Not that we think the outlook for them is fabulous or that we have great expectations on a total return basis. We just think that over the long term, large cap companies that are well managed and have a large part of their revenue coming from the big emerging markets will do better than bonds,” he says.

Markets tanked on Tuesday after Greece’s Prime Minister George Papandreou said that he would ask for a referendum from voters to agree or disagree on the proposed mechanism to save Greece from itself. However he puts it, voters who have been rioting on and off all year over austerity and cuts to public pensions are highly unlikely to agree to anything that made those cuts permanent.

His surprise move shocked local lawmakers and the market on Tuesday. And now a no-confidence vote is expected for Friday, The New York Times reported from Athens. A no confidence vote on Papandreou’s leadership raises possibility of a Greek government collapse that could mean a total, Argentine style default on Greek debt, putting dozens of major European banks in jeopardy as it would signal the possibility for similar problems unwinding in Italy. Italy is the world’s third largest bond market.

“Greece will vote against any referendum and that could have a spill over affect into Italy, which we feel is the next sore spot after Greece,” he says. Atlantic Trust has $17.5 billion under management.

The October relief rally is over.

So where should investors hide from the fallout of the Europe’s exploding debt?

“Our U.S. macro model went to negative from neutral in September. It’s now a matter of pick your poison,” says Paul Simon, chief investment officer of Tactical Allocation Group, a $1.5 billion asset management firm. “We are overweight cash. In equities we are buying the highly liquid large cap global names in the U.S. and emerging markets that have a lot of cash on hand to weather any storm in Europe. In fixed income, we are holding emerging market bonds because you have better fundamentals there and better spreads over Treasury bonds,” Simon says of the yield differential between 10-year Treasury bonds and emerging debt in countries like Chile and Brazil.

Simon likes the iShares Treasury TIPS exchange traded fund (TIP), the SPDR Gold (GLD) ETF and MSCI Emerging Markets (EEM).

He says stay clear of Europe. “We think Europe is probably already in a recession. The market is very dangerous right now,” he says.