According to Deutsche Bank, European Union leaders do not look unified enough to quell the fears of investors.
From this morning’s report:
We believe that a continuation of this trend is the primary risk that could see world
stocks (the MSCI World index) lose up to 35% of their value if the situation
deteriorates into a full-blown financial crisis on the scale of the fallout from the
collapse of Lehman Brothers in 2008.
In their Dooms Day Scenario: EU leaders can’t get it together, the financial sector falls 2/3rds. Utilities, industrials, telecoms and consumer discretionary would get crushed- so regions like Asia, Japan, and Europe. Healthcare, consumer staples and energy would be relatively protected.
How do you save yourself?
- Look for S&P companies with healthy balance sheets.
- In terms of credit: “Buy protection on European sovereign/bank/insurer CDS with exposure to systemic risk but which are currently cheap vis-à-vis this exposure.”
- Equities: “Buy a liquid put for crash protection.”]
- Rates: “Buy puts at the short end of the curve to hedge liquidity risks.”