Profit among the ruins

The place to look for investment bargains, said the fund manager Sir John Templeton, is not where the news is good, but where it is really bad. Today that means looking for advantage amid the volatility and extreme valuations which the crisis in the embattled eurozone has brought in its wake. The strikes and riots that are spreading across southern Europe are exactly the kind of scary scenario in which investors with ice-cold blood in their veins, as one admirer once described Templeton, have historically been able to profit.

Since June, the broad European stock market index has risen by 11 per cent, reversing the losses of the previous three months. Yet the Athens market, which has lost four-fifths of its value since 2007, is up by almost 60 per cent from its low point this year as fears of imminent Greek exit from the euro have receded. Anyone brave enough to buy so-called ‘garlic bonds’, government debt issued by Spain, Portugal and Greece, would have seen handsome gains in the last few months, buoyed by the European Central Bank’s recently announced (but still to be implemented) plan to cap yields on these debt securities through open-market -purchases.

Inevitably, European bank shares have been among the most spectacular performers, in both directions. If the euro collapses, most European banks will be seen to be bust — as opposed to one step from insolvency, which they are now. If the currency can be held together, then the thin sliver of equity that stands between the most exposed banks and outright insolvency could multiply in value several times over. Anticipating this binary outcome, shares of banks such as BNP Paribas and Société Générale have risen, fallen, then risen again by about 60 per cent three times in the last 12 months; those of the National Bank of Greece have doubled, halved and doubled again.