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Europe’s debt crisis enters its third year with no resolution in sight. Greece appears as likely to default now as it did in May 2010, when euro zone countries and the International Monetary Fund cobbled together an aid package — coupled with austerity measures — to enable Athens to meet its obligations.

Before that year ended Ireland became the first beneficiary of the European Financial Stability Facility, a bailout fund created in response to the Greek crisis and supported by the so-called troika: the European Central Bank, the European Union and the IMF. Last spring Portugal followed in Ireland’s footsteps and was granted a reprieve, but by the summer fears of contagion — notably in Belgium, France, Italy and Spain — had become so pronounced that the EU asked contributing countries to increase their commitments to the facility, eventually raising the total amount pledged from €440 billion ($579 billion) to €780 billion.

The EU established the EFSF in part to restore investor confidence. In ­December the ECB stepped up with a historic infusion of cash also aimed at reassuring investors; it agreed to lend more than 500 banks a total of €489 billion for a period of three years at just 1 percent interest. “The difference between December 2011 and January 2012 is striking,” notes Simon Greenwell, who directs coverage of Europe, the Middle East and Africa for BofA Merrill Lynch Global Research. “The large injection of liquidity authorized by the ECB has materially increased the long-term solvency of the EU banking system.”

However, investors’ nerves were rattled anew last month — on Friday the 13th, no less — when Standard & Poor’s cut the credit ratings of nine European countries. France was stripped of its cherished triple-A status, while Cypriot and Portuguese bonds were downgraded to junk (putting them on a level with Greece’s, and fueling speculation that a default by Portugal is all but inevitable). Italy and Spain each was dropped two notches; ­Austria, Malta, ­Slovakia and ­Slovenia were lowered one level apiece.

Three days after these downgrades, S&P cut the credit rating of the bailout fund itself.

“The risk of a sovereign default and the impact of spending reductions taken to avoid this outcome dominated investor sentiment in 2011, and this will extend into 2012,” observes Richard Smith, Deutsche Bank’s director of EMEA equity research. “Politics will have a crucial role to play over the next year.”

Greenwell says policy­makers have few options: “They can muddle through, separate or go for fiscal integration,” he explains. “Ineffective muddling through is the most likely scenario as governments appear unable to find a solution to prevent the crisis from ­spreading.”

And spread it has. Market pundits have taken to employing barnyard allusions to describe the situation. In 2010 they opined about problems with the PIIGS (Portugal, ­Ireland, Italy, Greece and Spain), and by last year were expressing concern about Europe’s broken EEGs (Everyone Except ­Germany). The message was clear: Investors need to be careful where they step.

Fortunately, there is no shortage of available guides; many firms have been boosting their coverage to keep clients up to date with all that’s happening. Institutional Investor asked money managers which analysts are doing the best job of providing the direction they find most helpful and thus deserve to be included in the 2012 All-­Europe Research Team , our 27th annual ranking of the region’s best analysts and teams. Deutsche Bank reigns supreme for a second straight year, with 44 total positions — seven more than in 2011 — and nearly triples its number of first-place teams, from six to 17.

BofA Merrill adds two positions, for a total of 30; that’s enough to bump the firm up one notch to tie with UBS for second place, the same spot the Swiss bank held in 2011. (UBS holds steady despite a loss of four positions.) Also returning in the same place as last year — in a tie for fourth — are J.P. Morgan Cazenove and Morgan Stanley ; each adds one position, bringing its total to 24.

Survey results reflect the opinions of some 2,200 money managers at more than 760 institutions managing an estimated $5.7 trillion in European equities, or nearly 84 percent of the MSCI Europe index’s market cap of $6.8 trillion at the time of polling. 

Citi makes the year’s most dramatic move, picking up six positions, for a total of 16, and leaping from tenth place to tie for sixth with Credit Suisse (which falls from No. 4). “We have totally refreshed our team, with over 60 analysts joining over the last 18 months,” explains ­Terence Sinclair, Citi’s head of equity research. “We have also focused on revamping our content. We added a new stock to Western Europe coverage every two days. We introduced a new, three-month recommendation alongside the 12-month recommendation, and we invested heavily in emerging-­markets research.”

The firm is emphasizing collaboration among its analysts across countries, regions and asset classes. “Undoubtedly, macro is king for the moment,” he explains. “Clients want as much insightful economic research — and strategy and sector research that is joined up to that economic research — as possible.” To meet that need, Citi publishes daily sovereign-­crisis updates and a thematic “Euro Weekly” report, and hosts regular investor calls with experts on key ­developments.

Teamwork is also the order of the day at UBS. “The macro­economic view continued to be the dominant influence on the direction and volatility of markets in 2011, and this is also likely to be the case at least for the first half of 2012,” believes Mark Stockdale, head of European securities research. “UBS responded with a significant uplift in notes from the economics team as well as from colleagues in fixed-­income, currency and commodities research and strategy, to provide a linked-up view of markets.”

Portfolio managers are demanding more research into the connections among regions and asset classes, agrees BofA Merrill’s Greenwell. “In 2011 we developed a multi-asset-class capability to help clients understand the links between equity, credit, commodities, foreign exchange, rates and structured finance — and highlight ways of mitigating market risk,” he says.

Deutsche is employing a similar approach. “A thorough understanding of macro drivers is more important than ever for equity analysts as they formulate their forecasts and recommendations,” according to Jonathan Jayarajan, associate director of EMEA equity research. “We have weekly meetings where the latest views of our economists and our equity, credit, foreign exchange and commodities strategists are articulated for the entire ­European equity research platform. It ensures that our equity research team always has the latest and most accurate interpretation of events.”

One frequent topic of speculation is whether the single-­currency union will survive. Deutsche’s Smith believes it will. “External observers tend to underestimate the determination of euro zone members to defend their currency,” he says. “They also tend to forget that the majority of EU members outside the euro zone want to join it eventually.”

Adds Jayarajan: “There is considerable political will at the heart of Europe to ensure that the currency succeeds, and we expect politicians to move far enough — under duress — to ensure the requisite treaties will be in place to deliver a functional currency.” However, he adds, “we cannot rule out that the member countries of the euro could change.”

Citi’s Sinclair concurs. “We don’t believe that the euro will break up, but everyone has to be positioned in case some countries leave,” he says. “These fears were the biggest drivers of indexes in 2011.”

Stockdale says UBS analysts “do not see the demise of the euro as a central case, but as a risk scenario. Investors were concerned as 2011 unfolded about the sustainability of the euro — with more concern from investors outside the euro zone itself.”

BofA Merrill believes a breakup is a “tail risk for 2012,” Greenwell says. David Hauner, the firm’s head of emerging EMEA economics and fixed-­income strategy, modeled a scenario whereby dissolution resulted not in a reversion to single-­country currencies, but rather in the establishment of three regional economic unions. “This is a useful structure, to look at the euro zone by geographic approximation, and these could be applied to thinking behind growth rates,” Greenwell adds.

Will the region produce growth? “Unless the sovereign-­debt and banking crises are solved, it is a simple no,” he says. “We remain as bearish on the euro zone as we were last year.”

Others are more optimistic. “Our strategists expect European equity markets to be up moderately by year-end, although they see considerable downside risk in the first half as the markets remain jumpy around sovereigns’ refinancing,” Jayarajan says.

Citi is more bullish still. “We are reasonably upbeat on equities and forecast a 20 percent gain in global equities by the end of 2012,” says Sinclair. “We think the market has priced in a global recession, which is unlikely. In Europe we have strategies built around ‘world champions’” — that is, locally based companies exposed to high-growth overseas markets.

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