How Will the European Debt Crisis Impact Investment Planning for 2012

The end of the year is quickly approaching. Aside from holiday planning, this is also the time to look at your tax situation and perform a little fine-tuning on your investment portfolio, if you are fortunate enough to have one these days. Financial news headlines have been a glow with “the good, the bad, and the ugly” with regards to the financial crisis in Europe and all of its ramifications going forward. From an individual perspective, what does this mean for the forthcoming year

To begin with, all experts and investment advisors are warning of the increased volatility in our global markets, from equities and bonds to commodities and currencies. The “cousin” of volatility is uncertainty. Uncertainty breeds risk aversion and what many describe as a flight of capital to “safe havens”. Turmoil in our markets causes risk profiles to escalate, making credit more difficult to access. Our banks are already stressed due to usda home loans, but holding European debt securities in their various portfolios will only lessen their desire to loan money to small businesses. It may be better to seek an unsecured business loan from a non-banking company on the Internet than to approach your local banker. Banks are still heavy into credit cards, their remaining source for an unsecured business loan.

When it comes to your investment portfolio, diversification into entities that are not so dependent on growth in Europe may be wise. Knowledge has increased dramatically over the past two years when it comes to understanding European dependencies. Companies in our S&P 500 index derive 14% of their sales from their European business partners, but as with any average, some companies are more heavily impacted than others. Trade in both directions tops $600 billion every year, and with growth already flat and business confidence declining, any existing problems may only become larger as time goes on.

What are the current export demographics to the European area? Here is a brief breakdown:

• Automotive Industry - 27%

• Food, Beverage and Tobacco - 22%

• Materials - 20%

• Consumer Durables and Apparel - 16%

• Capital Goods - 15%

Are there any companies that should be avoided for the near-term? In the auto sector, the two names that stand out are GM and Ford. Each has extensive operations in Europe, and both have been warning of losses attributed to their local presences there. From a tobacco perspective, Phillip Morris is heavily exposed. Two out of three of their sales dollars comes from Europe. Dependencies in the materials sector are around drugs and chemicals, leaving Dupont and Dow to contemplate their fates. For those that followed recent quarterly earnings reports, the fall of Abercrombie & Fitch shares have signaled problems affecting the apparel trade in the Eurozone. Lastly, solar panel sales will also plummet since demand is highest in Europe, and retrenchment is already taking place.

Perhaps the best advice comes from the community of investment advisors. They suggest backing away from volatile markets until the present storm passes.