Europe Market Report - Identifying Safe Havens in Europe - July 2012

Jul 28, 2012

The crisis in the European sovereign bond and equity markets that started in late 2009 is still not resolved. As European economies and the local equity markets form a strongly connected network, the whole region – including core countries – is exposed to potential negative developments in Greece, Portugal, Spain, Ireland, and Italy. In this report, we show how the Barra Europe Equity model (EUE3) can be used to help identify stocks that are less sensitive to the unfavorable movements in troubled countries. Using the covariance matrix of the EUE3 model, we calculate the predicted betas of European stocks with respect to a given country. After repeating this separately for the five most troubled countries (Ireland, Portugal, Spain, Italy, and Greece), we look for common characteristics of the lowest beta stocks. Our results show important regional, sector and style commonalities among these securities.