This article appeared in Volume 30, Number 10 of the Minneapolis/St. Paul Business Journal on August 3, 2012, page 8. It has been reprinted by the Minneapolis/St. Paul Business Journal and further reproduction by any other party is strictly prohibited. Copyright ©2012 Minneapolis/St. Paul Business Journal, 333 South 7th Street, Suite 350, Minneapolis, MN 55402

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That depends. Because the economic problems in Europe, China and Washington, D.C., are linked glob-ally, “it’s hard to segment a portfolio away from having any exposure,” said Cameron Hinds, regional chief investment officer (CIO) for Wells Fargo Private Bank.

However, business owners and investors who un-derstand the risks and opportunities that accompany these global economic crises — as well as what some of Minnesota’s largest corporations are doing — will be better equipped for what may come.

Euro meltdownThe situation

Intended to link Europe’s governments and curren-cies, the euro has accomplished that in good times and bad. Rampant unemployment, rising borrowing costs and recessions at the member-state level (if not the en-tire euro zone) have pushed down demand for goods and services originating in the United States.

“Where Europe goes, the U.S. follows. ... It has a di-rect effect on U.S. employment and U.S. businesses,” said Deloitte Chief Economist Carl Steidtmann, who sees Europe as the greatest risk to global economies.

Bailouts for troubled nations don’t guarantee that those countries will remain on the euro zone’s shared currency or under the European Central Bank’s pro-tection. “Ultimately a lot of these issues will be solved, [but] it’s going to take awhile,” Hinds said.

Navigating the watersResolving the euro crisis and sparking an economic

recovery could take at least two years, said Hinds, who warned investors to stay away from European bonds.

European stocks seem to be increasingly well-priced given the market turmoil, but Hinds cautioned that “it may be a little early to make much of a move in that direction.”

Companies that do business in the GIPSI nations (Greece, Ireland, Portugal, Spain and Italy) should “think very carefully about their credit risk and credit exposure,” said lawyer Tim Maloney, co-head of Minneapolis-based Dorsey & Whitney’s London office.

He believes the euro will survive, and he isn’t telling clients to pull out. However, he warns that businesses should consider renegotiating contracts with partners in weaker European nations to include affiliates in stronger countries like Germany, France and Belgium. New deals should also include other forms of security and terms that dictate the jurisdictions and currencies of business deals.

“You don’t want a contract where you’re selling in euros today and being paid in drachmas tomorrow,” Maloney said. “A good customer should have no dif-ficulty agreeing with sensible precautions.”Finding opportunities

Businesses buying from Europe can expect lower prices thanks to decreased global demand and domes-

tic currency gains on the euro, which is down against the U.S. dollar by about 6.5 percent this year.

Also, bailed-out European banks are being forced by regulators to sell foreign operations and assets, includ-ing those in the United States, opening the door for American buyers.

Corporate strategies3M Co. is tightening costs in Europe with a hir-

ing freeze, but also benefiting from several years of organizational restructuring that included management and back-office cuts. The Maplewood-based manufacturer continues to consolidate European manufac-turing and supply chain support functions.

C.H. Robinson Worldwide Inc. is opening offices and considering acquisitions in Europe, CEO John Wiehoff said on an earnings call last week. “It’s not the greatest environment to really be trying to invest more aggressively and taking market share. … [But] there’s a lot of opportunity for longer-term market share gains, and we have ramped up our commitment to it this year.”

China slowdownThe situation

American-based multinationals pursued Chinese buyers in the Great Recession, hoping for a piece of China’s double-digit economic growth. Now, the eco-nomic climate is changing.

“China’s the big engine, and everybody knows they’ve slowed down,” said U.S. Bank Private Client Reserve CIO John De Clue.

China’s economic data is suspect for reasons rang-ing from corruption to national pride, but De Clue said estimates show the country’s economy slowing from a 10-percent rate of growth to 7 percent or less.

Navigating the watersThe slowdown will hit major Chinese trade partners

such as Australia, India, Brazil and Japan, if they haven’t already. The same is true for American multinationals and some of Minnesota’s largest corporations.

“Fortune 500 companies in the U.S. will definitely feel the impact of China slowing,” said Tony Hallada, CEO of CliftonLarsonAllen Wealth Advisors.

Seven percent growth is still strong, but businesses should pick their trade partners carefully or consider doing business in other developing Asian markets, such as India, Vietnam and the Philippines.

Despite short-term stability issues, however, inves-tors and businesses should focus on China’s potential to be an economic powerhouse in the years ahead.

“Longer term, China will be a good investment,”

Hallada said.

Finding opportunitiesChina’s thirst for raw materials like oil, copper and

coal pushed global prices up during the recession. It’s a trend now reversing itself as the country’s growth slows.

Also, Chinese investors have slowed their purchases of U.S. debt in the first half of 2012, and if they stop buying and start selling, interest rates could rise from their historic lows.

Corporate strategiesThe Valspar Corp. added 200 stores in China since

late 2011, cut less popular paint products in favor of stronger sellers and is pushing low-income housing products as the Chinese economy slows.

“Our focus was on the affordable-housing market because that’s the segment that’s being supported by the [Chinese] government,” CEO Gary Hendrickson said in a May earnings call.

Piper Jaffray Cos. is exiting the Hong Kong market. CEO Andrew Duff told investors last week that the firm can’t afford to broaden the business beyond Chinese IPOs, which would help the firm withstand down markets.

“Hong Kong is a growth market, but it is also charac-terized by significant volatility,” he said.

D.C. breakdown

The situationAn 8 percent national unemployment rate and el-

evated levels of household debt are holding consumer spending back. Estimates put economic growth at less than 2 percent per year in the United States, while the Federal Reserve expects to keep interest rates low through 2014 to spur growth, however limited the ef-fect has been and will be.

Federal lawmakers routinely filibuster tax, jobs and regulatory legislation, and last year raised such a stink on increasing the debt ceiling that the government’s credit rating was downgraded for the first time in his-tory. Unless Congress acts, tax increases and spending cuts will take effect at the beginning of 2013 and likely put the U.S. economy back into recession (and that’s even before Washington addresses the nation’s budget deficit and growing debt).

The spending cuts would directly affect defense contractors, while tax increases would have the largest drag on the economy by reducing consumer spending power.

Navigating the watersThe uncertainty surrounding this combination of

tax increases and spending cuts, known as the fiscal cliff, “impacts [business and consumer] sentiment in a negative way,” De Clue said.

He does see promise in the resurgence of manu-facturers, the strengthening housing market and the growing population and labor force.

“Can you look through the short-term noise, can you accept the volatility and focus on what could be some longer term opportunities? That’s the conversa-tion we have,” De Clue said.

Owners of privately held firms are getting out of their businesses, and private equity firms are selling more of their portfolio companies to lock in the 15 percent capital gains rate, said McGladrey tax partner Todd Jackson, who leads the practice in Minneapolis.

Hot-and-cold economic data and stop-gap solu-tions out of Washington, along with worrisome de-velopments out of Europe and China, have caused market volatility, but a fully diversified portfolio — not just stocks and bonds, but also real estate, high-quality hedge funds and private equity holdings — is “one of the best ways to fight the volatility we’re experienc-ing,” said Wells Fargo’s Hinds.

He recommends underweighting U.S. securities due to low returns, and encouraged holding domes-tic stocks for the long run. He expects interest rates to climb, but “getting the timing right is a challenge.”

Businesses should continue to run conservative, lean operations, CliftonLarsonAllen’s Hallada said. “Plan for the worst and hope for the best. Operate your business very tight, do not loosen the reins much. Take what the market gives you.”

Finding opportunitiesOverseas manufacturing is coming back home as

it becomes more capital intensive and less reliant on labor, Deloitte’s Steidtmann said. Manufacturers want to be closer to consumers, avoid global instability and the complexity of doing business in developing mar-kets like China. “The advantage of cheap labor is not the huge benefit that it once was,” he said.

Corporate strategiesIn response to lackluster investment opportuni-

ties and the uneven economy, Minnesota corpora-tions have been hoarding cash since the recession. Minnesota’s 100 largest public companies together had a $33.1 billion stockpile of cash and equivalents at the end of their 2011 fiscal years, according to Minneapolis/St. Paul Business Journal research. While some companies have upped stockholder dividends or reinvested in their operations, others said the econom-ic recovery has been too fitful to start spending now.

jhammerand@bizjournals.com | (612) 288-2138

Europe may be melting down. China’s economy is slowing down. Washington politics have broken down. What can an investor or business owner do to keep from shutting down? BY Jim HammeraNd | Staff Writer

Slowdowns, meltdowns and breakdowns

Wiehoff