David Kuo: Be wary of besieged Europe until the storm passes

Investment Insider
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The Independent Online

What a mess! Ireland has finally admitted that it needs help from its friends, even though a fortnight ago it was adamant that it did not need financial assistance.

Ireland was right, up to a point, to claim that it was different to Greece. It has enough money to see it through to the middle of next year. However, the Irish government did underestimate the parlous state of its banks that was brought about by years of reckless lending. Ireland’s bailout had little to do with its national debt – it was to repair the balance sheets of its crumbling banks. Europe’s concern was that, given the labyrinthine relationship between Europe’s banks, an Irish bank collapse would have devastating knock-on effects. However, Europe’s efforts have been about as effective as herding cats. Clearly, the market has not ruled out bailouts for Portugal and Spain. Britain is in an entirely different position: it is in control of its own currency, which it can devalue to inflate away its national debt.

From a cautious investor’s perspective, it may pay to avoid exposure to besieged European countries until the situation becomes clearer. Wary investors might prefer the UK Gas, Water and Multiutilities sector for shares that currently offer inflation-beating dividend yields. These include National Grid and United Utilities that are on prospective yields of 6.5 per cent and 5.1 per cent respectively. The Oil & Gas sector is another good area for high-yielding shares. Royal Dutch Shell, a FTSE 100 stalwart, is on a prospective yield of 5.6 per cent.

It is generally said that investors should buy at the sound of gunfire and sell at the sound of bugles. However, when it comes to Europe, it may be prudent not to stand directly in front of a live cannon.

David Kuo is the director of the financial website fool.co.uk

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