How to Play the Coming Eurozone Depression
In 2013, when it was announced that the eurozone had emerged from its double-dip recession, the European stock market was optimistic and drove stocks higher.
Yet there was a sense the route to higher gross domestic product (GDP) growth was not clear due to the massive debt still on the books of many of the eurozone’s weakest members, widely known as the PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain). Yes, the countries have shown some recovery, but they continue to be plagued by massive debt and abnormally high unemployment.
Unemployment across the region continues to run in the low double-digits, around 12%. For the youth under the age of 25, it’s much worse, with the unemployment rate around 40% in some of the PIIGS countries.
The problem is that a weak jobs market in the eurozone doesn’t reflect positively for the economies.
We are now seeing growth issues with the two pillars of the Eurozone, Germany and France, which are widely credited with helping to save the eurozone from a financial Armageddon.
The effects of the economic sanctions placed on Russia for its involvement in the Ukraine crisis appear to finally be filtering their way through to the eurozone and Europe, specifically Germany. One of Russia’s biggest trading partners, Germany saw a 5.8% decline in its exports in September alone.
The reality is that a weaker Germany doesn’t bode well for the eurozone.
In addition, with more than 800 million inhabitants in Europe, the market is significant. Slowing in this market will surely have an impact on growth in China and the United States, as well as the global economy.
Russia is a big reason for the economic stalling, and it doesn’t look like President Vladimir Putin really cares that much about the sanctions for the time being; albeit, it will likely drive the country into another recession and kill growth in eastern Europe if it is allowed to simmer.
The Kremlin is now looking east for trade with its ally China, which could help to offset the reduced business from the eurozone and Europe.
Under the assumption Russia will continue to ignore the sanctions, we could definitely see some stalling in growth in Russia, the eurozone, and the remainder of Europe to the point of another recession—possibly a depression.
To play the coming downgrade in the region, investors may consider buying put options on several exchange-traded funds (ETFs) like iShares Europe (NYSEArca/IEV), iShares MSCI Germany (PCX/EWG), and SPDR S&P Russia ETF (NYSEArca/RBL).