Colin McLean: Investors can still find value despite crisis in Eurozone

The stock market's progress this year contrasts with increasing evidence that the business environment is extremely tough. Scotland may not yet be following Ireland into a double dip, but recovery is muted. And news from Europe is worrying: Ireland and Greece may not be the only countries needing bailouts.

Should investors be concerned about the weakening economy, or rely on the authorities to stimulate further recovery? The optimism of 2009 is now giving way to doubts about the global recovery. China is boosting global growth, but this should be put in context: the UK still exports much more to Ireland than to China. Certainly, some Scottish businesses, such as Weir Group and Wood Group, are winning business internationally. But the fate of Scotland's economy will depend more on its public finances and neighbouring trade partners.

Some of this reality is already recognised by the stock market. The greater volatility of share prices shows the two-way pull of optimists and pessimists, and many share prices are actually performing very badly. Sectors more dependent on the UK economy, such as housebuilding and pubs, are typically down near 18-month lows. While the biggest and most internationally exposed businesses have made progress, many domestic, small and medium-sized companies are lagging. The stock market is increasingly polarised.

The real economy does matter. Investors are right to pay attention to the forest of "for sale" signs on pubs, which highlight the industry's challenges. Other underperforming areas include retailers, property services and newspapers. And most banks have now lagged the market averages for more than 12 months, with Lloyds Bank the notable exception.

However, the bigger question is whether it is still safe for investors to crowd into the remaining pockets of growth? Global trading patterns are unstable, as are currencies, and the US is increasingly unwilling to tolerate this imbalance.

All would lose in a trade war that involved import restrictions, but the US would lose less than most; Germany and China much more. The stock market would react badly to a trade war, but it could trigger a recovery in the US dollar.

If there is a silver lining in the Eurozone problems, it is that the pressure is off the UK for the moment. Defaults on debt in some European countries look unavoidable, whether this is dressed up as restructuring or not.

An exit of a single nation out of the Eurozone might be possible without sinking the euro. What is not sustainable is the continued undermining of EU finances, as the ECB pretends it can swallow up bad debt without penalty. The US and Europe are turning bad bank debt into a sovereign debt problem. And Ireland roped its national fate to that of its banks on the day in 2008 it announced that the government was guaranteeing all its banks' deposits. Too many governments believe they can muddle through the crisis without making hard choices.

UK banks are conducting a huge scale of trading business in other currencies outside the UK, with a continuing need for financing. Their need to maintain confidence poses risks for the UK that the Bank of England can not readily underwrite.

The Bank's governor Mervyn King highlighted this danger in a recent speech, and further government action on Britain's banks seems likely. Even if the UK Banking Commission does not require banks to be broken up, the UK could follow Switzerland in setting higher capital requirements. This could see a further round of fundraising by some banks. Although our banks are sound financially, they could be forced to raise more cash in order to cut the risk to the UK taxpayer.

Despite the challenges for consumers and financial sectors in the UK, there is value in the stock market. British industrial companies such as IMI, Invensys and Croda are still underrated relative to international competitors, and could attract bids. And oil and gas groups are enjoying success with North Sea drilling, and could also be attractive takeover targets.

The risks in Europe and the uncertain background for the UK economy should not deter investors. The stock market still offers opportunities in industrials and resources, and shares could make progress over the next few months.

Colin McLean is managing director of SVM Asset Management