How To Profit From The Eurozone Crisis

|
Includes: DRR, EPV, EUFN, EUO, GLD, IAU, IFEU, SAN, UNRDY, VNQI
by: Uncle Scrooge

The Eurozone sovereign debt crisis is still unresolved and is making investors feel queasy since it is depressing markets on both sides of the Atlantic ocean. Where there's a problem often there's an opportunity; here's how you could take advantage of the EU crisis to reap some profits.

Short the Euro

The first idea that comes to mind is shorting the Euro. In the past year, since may 2011, the euro has lost 10% of its value against the dollar and, if Greece will abandon the European currency, it may drop even further. To short the Euro you could buy the ProShares UltraShort Euro ETF (NYSEARCA:EUO) or the Market Vectors Double Short Euro ETN (NYSEARCA:DRR). These are 2x leveraged so beware that your profits may accumulate faster but so may your losses.

Buy Gold

Gold has always been considered a safe harbor in troubled financial times, so the second obvious strategy could be going long the SPDR Gold Trust (NYSEARCA:GLD) or the iShares Gold Trust (NYSEARCA:IAU). The precious metal has peaked at $1900 an ounce early last September and has lost almost 20% since. It stands at about $1580 an ounce as of this writing.

Short Equity ETFs

If you feel that the EU crisis will continue depressing equities for the rest of the year, you could profit either by shorting a broad EU ETF such as the Vanguard MSCI Europe ETF(NYSEARCA:VGK) or buying an inversed leveraged ETF such as the ProShares UltraShort MSCI Europe (NYSEARCA:EPV). Even more profitable may prove shorting sector funds such as the iShares MSCI Europe Financials (NASDAQ:EUFN), since banks are likely the first pieces of the domino to fall if the crisis gets worse.

Cheap real estate

Hard assets often turn out to be a sound investment during troubled times, so investing in real estate to diversify your portfolio is seldom a ad idea, provided you don't invest during a housing bubble. Prices in Europe are more depressed than ever so a good investment vehicle could be the iShares FTSE EPRA/NAREIT Developed Europe ETF (NASDAQ:IFEU). The fund is somewhat illiquid, so a better option could be the Vanguard Global ex-U.S.Real Estate ETF (NASDAQ:VNQI) which also diversifies away from Europe, so it is better suited for less risk-prone investors. If you are willing to take a chance, a good proposition could be buying shares of Europe's largest commercial real estate company, Unibail Rodamco (OTCPK:UNRDY). The Dutch-French company manages shopping centers, convention centers and office properties. It has a market cap of $12.5 Bil., a P/E ratio of just 9.5 and pays a nice 5% dividend.

Contrarian investing

A famous quotes from Warren Buffett goes: "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well". Widespread pessimism can lead the market to understate a company's real value; contrarian investors seek to take advantage of mispriced assets caused by over pessimism (and also over optimism).

In a recent article I listed ten dividend paying companies from Europe that are indeed attractive given the quality of their businesses, their cheap valuations and their good dividend yield.

In another article I listed eight companies from the PIIGS (Portugal, Ireland, Italy, Greece and Spain) that have outperformed the European Stoxx 50 index in the past three years, thus disregarding the crisis.

Value investors who have been able to separate the wheat from the chaff bought Wells Fargo (NYSE:WFC) in March 2009 when it went below $10, and have trebled their money since. Also, its dividend yield on cost may soon rise to over 10%. Banco Santander (STD) is one of largest bank in Europe and may turn out to be such a great opportunity as Wells Fargo was in 2009.

Disclosure: I am long STD.