Stocks for Safety?

Woe to the Unfortunate souls still exposed to European debt. The smart money (people like Warren Buffett and hedge funders not named John Paulson) got out of it 18 months ago. Initially, a lot of that money fled to U.S. T-bills, which have benefited somewhat from the chaos overseas. But that advantage may not last for long. Even as it threatens to downgrade most of Europe, Standard & Poor’s stripped the U.S.’s AAA rating after this summer’s debt-ceiling circus, which looks to become a regular event. AA, it seems, is the new AAA for rich countries.

For investors, the upshot is that blue-chip stocks have become the new bonds. In a crazy investing world where once rock-solid government debt has become risky, the safer play is to buy the stocks of large multinational franchise firms. After all, which would you rather own–exploding Eurobonds and sleepy T-bills that aren’t even keeping pace with inflation or the stocks of large multinationals like PepsiCo, Procter & Gamble and GE that are growing fast in hot emerging markets and paying a safe, predictable and inflation-beating yearly dividend in the meantime? “In the world we’re living in, there’s not much better you can ask for,” says Barton Biggs, managing director of hedge fund Traxis Partners and an American-blue-chip bull for several years now.

What’s more, many within this category of quality stocks are currently undervalued. Market volatility tied to fears about Europe and the ramifications of political gridlock in Washington has held back equity markets even as corporate earnings continue to rise. But given half a chance, stock prices will rise too. We saw jumps in the Dow this past year almost anytime politicians did something right and markets felt a sense of security about the political and macroeconomic landscape. A recent Bank of America Merrill Lynch survey of major global-fund managers found that 50% expected corporate profits in the U.S. to be up in 2012 and many were already dipping into their cash reserves to buy stocks of big multinationals. “U.S. equities are seen as a refuge from turmoil,” says Michael Harnett, chief of global-equity strategies at B of A Merrill Lynch Global Research.

Funny, that’s what they used to say about T-bills. While the case for investing in blue chips as the new bonds is clear, what’s more interesting are the as-yet-unknown political implications. The middle class still holds most of its wealth in housing, and the recovery of that market is likely years away. Meanwhile, stocks have regained much of their post-financial-crisis losses, making the rich, who hold their money disproportionately in equities, still richer and increasing the wealth divide in the developed world.

What does it mean that multinationals (and the people who run and invest in them) continue to fly over the messy business of debt crises and public protests that continue to rage in so much of the world? Does it matter that international companies and investors get richer even as individual countries are failing? What responsibilities do these companies have, beyond profitmaking, to the countries where they operate? Whatever the answers, you can bet that this bifurcation–between companies and countries and between stocks and bonds–will be at the center of a lot of economic and business news in the coming months.