Europe: Still a huge pain in the neck for investors

@CNNMoneyInvest January 3, 2012: 9:37 PM ET
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Mario Draghi, the president of the European Central Bank, dismisses the idea of a euro break-up but also is opposed to setting up the ECB as the lender of last resort to troubled governments.

NEW YORK (CNNMoney) -- Investing experts may be predicting a modest rise for stocks in 2012, but it will be far from smooth sailing.

The nastiest headwinds continue to blow out of Europe, according to an exclusive CNNMoney survey. In fact, more than two-thirds of the 35 market strategists surveyed agree that Europe's nearly 2-year-old debt crisis will drive investor sentiment and the market's moves in 2012 -- pretty much like it did in the latter half of 2011.

"Europeans have been dancing on the edge of a cliff for some time now, but this could go on for an extended period," said Mark Coffelt, president of Empiric Advisors. "The debt problems there will continue to irritate the market all of next year, and likely well beyond that."

While strategists largely agree that the worst-case scenario -- a break-up of the eurozone -- is an unlikely (and unwanted) outcome, the problems could get worse than they are now, despite the efforts to solve them.

"It's hard to say how bad it's going to get, but you could have a situation where the stronger countries decide to jettison the weaker ones," said Peter Tuz, president at Chase Investment Counsel.

"Or you could see something where Greece decides to go its separate way," Tuz added. "The market could live with that, but once you throw Italy and Spain into the mix, that's much harder to swallow."

CNNMoney survey: Where the markets are headed in 2012

Coffelt also said that investors are more worried about how Europe's sovereign debt problems will impact bank balance sheets, and in turn, global economic growth.

"European banks are loaded up on sovereign debt, so if there is a default by a European country, the whole banking sector could be in deep trouble," said Coffelt.

In an effort to clean up their balance sheets and soften the blow of a sovereign default, European banks are in the process of deleveraging. That means reducing the amount of debt they hold and tightening lending standards, the latter of which typically hinders economic growth.

To slow down and mitigate the effects of that process, the European Central Bank stepped in last month with a €489.19 billion ($643.18 billion) lifeline that will allow European banks to take out 3-year loans at a low rate of 1%.

"Of all the actions we've seen so far, the ECB's loan program is a big step that will help the banks," said Tuz, "But there are still a lot of issues, and there doesn't seem to be a be-all and end-all solution."

European recovery? Wait till 2013 (at least)

Investors are also holding out hope for the central bank to commit to buying an unlimited amount of European sovereign debt to provide an even more secure backstop to Europe's problems.

Tuz said he will be keeping a close eye on European banks as they begin to open the books and report full-year financial results for 2011, which should include how much capital they have.

In addition to Europe's problems, investors are also casting a nervous eye on Washington.

As the November elections near, the political gridlock that frustrated investors last year will remain in the spotlight.

While stocks perform well in election years on a historical basis, the high degree of political uncertainties will make it "difficult for business and individuals to plan and spend money," said Frank Fantozzi, CEO of Planned Financial Services.

"Businesses aren't sure how much to invest, or consider expansion, because there is no clear framework from the government," he added. To top of page

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