Europe, a thundercloud over financial markets for three years, might burst this month into a downpour, even after a rescue of Spanish banks. For investors who want to stay dry, some shelters look sturdier than others.
Junk bonds, companies that make consumer products and even some European stocks could add a healthy shot of profit to well-designed portfolios, analysts and traders say.
For the third straight spring, fear about Europe's debt crisis has rattled U.S. stocks. Spain agreed over the weekend to accept a bailout of up to $125 billion for its ailing banks, but investors are still worried that Greece will exit the euro.
The next date to watch is June 17, when Greece holds an election. If the far-left party wins, Greece may spurn the program of bailouts and steep budget cuts that has kept it afloat.
Global markets would probably whip and dive if that happens. But if the worst fears don't materialize, global markets will probably see a short-term "relief rally."
The trouble is that nobody knows how the European crisis will unfold. So investors need diverse portfolios that won't crumble if things get ugly _ or miss the updraft if Europe simmers down.
David Kelly, chief global strategist at JPMorgan Funds, says it makes sense to tilt your portfolio slightly toward investments valued in U.S. dollars _ stocks and bonds issued by U.S. companies _ because U.S. markets are likely to remain more stable.
In uncertain times, a company's products matter. The more necessary the product, the better its producer can weather a typical economic downturn, says Jerry Webman, chief economist at OppenheimerFunds, an asset management firm.
"People are still going to brush their teeth, even if the economy gets into difficulty," Webman says. He likes companies that make boring yet necessary products like food, dustpans and dental floss.
The exception: any company that depends on exports to Europe for a big chunk of its revenue. Analysts say investors should review companies' financial statements to find out which rely heavily on European consumers. Those are the people who would cut back on spending if the crisis deteriorated.
"People want to be cautious about anybody who's exporting to Europe, and look for some opportunities among companies that are exporting to other parts of the world," Webman says.
For example, cosmetics maker Avon Products generated 28 percent of its revenue from Europe, the Middle East and Africa last year. Estee Lauder generated 37 percent of its sales in that region.
That might make Avon a better bet, experts say, because it appears to be less dependent on spending by European consumers. Estee Lauder acknowledged the threat of European "softening" in its latest quarterly financial report.
The same logic applies to European companies that depend on exports. In the world of multinationals, it matters less where a company is based than where its customers are, says Peter Tchir, manager of the hedge fund TF Market Advisors.
He points to two multinational food companies: Nestle, based in Switzerland, and Kraft, based in Northfield, Ill.
"Their businesses are a lot more similar than people realize," Tchir says. "What you really should do, across the board, is look at European companies that are as global as U.S. companies, but where the stock has sold off significantly."
Kraft's stock is up 82 percent since its financial crisis low in 2009. Nestle, which trades on a Swiss exchange, has recovered only 55 percent from its 2009 low, in part because of instability in European financial markets. Given the companies' similarities, that might make Nestle a better bargain for investors, Tchir says.
In fact, for those with strong enough stomachs _ and time to do their homework _ European stocks might be the best value around, several experts say. They tend to have bigger dividends than U.S. stocks. And European markets have lost more value than U.S. indexes _ a disparity that bargain-hunters can exploit.
Europe is home to makers of luxury goods, engineering and machinery _ all products that Americans and Asians will be happy to buy if a weakening euro drives their prices down.
"Fears about Europe drive down the value of the euro," Webman says. "If I'm an exporter, this works to my advantage."
Although the possibility makes most observers queasy, a splintering of the euro might help stronger economies by untethering them from weaker ones, Webman says. That could mean a resurgent euro currency and big gains for stocks and bonds based on the common currency, Webman says.
For those seeking a truly risk-free experience, U.S. Treasurys remain the world's safest investment, experts say. Webman says most people should keep at least some of their portfolio in these good-as-cash securities. But the yield on the 10-year note hit a record low of 1.44 percent earlier this month, so the returns will be minuscule.
"If you're looking for an insurance policy, U.S. Treasurys are as good a place to be as any," Webman says. "Just remember that's very costly insurance that you're putting into your portfolio, so size it appropriately."
In other words, don't buy more Treasurys than you might need to convert into cash quickly. The rest of your investment dollars can be put to better use elsewhere.
Low Treasury yields have made high-yield corporate bonds more attractive by comparison, says Tchir, the hedge fund manager. High-yield bonds _ also known as junk bonds _ are issued by companies that don't have the sterling credit ratings of giant multinationals. They carry more risk but offer bigger returns.
"These companies tend to be smaller and more domestically focused, so you don't see the same level of business slowdown for them" if Europe implodes, Tchir says.
Another bonus for high-yield bonds: If Europe blows up, threatening the U.S. economy, the Federal Reserve could take more action to keep Treasury rates down. That would boost demand for higher-yield bonds, a boon for those who already own them.
Because no one can predict the outcome in Europe, it's even more important that investors balance their portfolios across a range of investments, based on their risk tolerance _ how much they're willing to lose for a shot at big returns.
Too many U.S. investors have fled volatile markets and are keeping their money in ultra-safe accounts that will barely budge when the market eventually rises, Kelly says. He says that leaves many U.S. stocks cheap by historical standards.
"Before you decide how you're going to incrementally deal with Europe risk," he says, "you have to ask: `Am I too conservative to start off with?'"
Daniel Wagner can be reached at http://www.twitter.com/wagnerreports .