Investors who shun the bonds of economically troubled countries in the euro zone miss dramatic movements that can benefit their portfolios, says Seema Shah, global rates strategist at Principal Global Investors.

“There is a danger to be completely out of the market,” says Shah, who is based in London. “You can’t take your eyes off the screen or your finger off the button.”

She expects new Italian Prime Minister Mario Monti to assuage the markets and present a credible plan to cut the country’s deficit.

“The rise in bond yields above 7 per cent put the fear of god into them,” says Shah.

She is more concerned about Spain.

“In some ways Spain is in a better condition as its debt position is considerably stronger,” says Shah. “But with youth unemployment around 50 per cent there are serious fundamental economic risks that cannot be ignored.”

Europe will have to introduce more flexible labour and capital markets if it is going to avoid a similar crisis, she says.

“I expect such structural reforms to be introduced next year,” says Shah.

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