Are These The Greatest Success Stories In Europe?
It’s been five years since the Financial Times first made use of one of the less flattering economic acronyms: PIIGS. Back then, Portugal, Ireland, Italy, Greece and Spain were seen as economic basket cases, and it was widely assumed that one or several of them would eventually default on their massive debt burdens.
While such an event has yet to pass, Greece remains quite sickly, and Portugal and Italy continue to wrestle with profound economic dislocation. To varying degrees, these countries have failed to embrace the badly-needed economic reforms that are essential to sow the seeds of a lasting economic recovery.
Yet despite heavy odds, Ireland and Spain are clearly on the comeback trail. Thanks to broad-based reform packages, their economies have begun to turn the corner. And with the aid of a very competitive currency, their futures are looking far brighter than most would have suspected just a few years ago. For investors, exposure to these dynamic turnaround stories can be had through a pair of country-specific exchange-traded funds (ETFs).
Ireland Is Back In Business
Ireland and its citizens are remarkably resilient. They have been through myriad crises over the past two centuries, and always manage to bounce back. Most recently, they saw the country’s economy crash and burn in the economic crisis of 2008-2009. Irish banks eventually grew so weak that a wave of bankruptcies were a real possibility. By 2012, unemployment in the country had risen to nearly 15%.
Fast forward to 2015, and Irish economic growth is on pace to exceed 5% for the second straight year. Unemployment has moved below 10%, and in light of current economic growth rates, appears set to keep falling. How did this laggard turn into a Eurozone leader?
As part of a $113 billion European bailout package in 2010, Ireland’s government radically pared spending. While other PIIGS nations were asked to do the same, none were as willing as Ireland to take the tough medicine. While those other nations continue to require fiscal support to stay afloat, Ireland voluntarily exited the EU bailout program 18 months ago. At first, it was unclear if the Irish economy could live without a lifeline. But we now know that the patient has a pulse. Growth in retail spending, bank lending, and corporate capital spending are all among the highest in the EU in 2015.
Companies such as Google (Nasdaq: GOOG), Facebook (Nasdaq: FB), LinkedIn (NYSE: LNKD) and Twitter (NYSE: TWTR) have joined tech veterans such as Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) in establishing Dublin as their European headquarters. And thanks to the sharp plunge in the euro over the past year, those firms now find their Irish employee base to be even more attractively-priced than before. According to IBM’s (NYSE: IBM) Global Locations Trends report, Ireland was just named as the most appealing country in the world for high-value foreign direct investment for the fourth straight year.
The best way to invest in Ireland: iShares MSCI Ireland Capped ETF (NYSE: EIRL). The fund, which carries a 0.48% expense ratio, owns a broad range of Ireland-based companies such as building materials supplier CRH Plc, food and beverage firm the Kerry Group, and the Bank of Ireland.
The Spanish Comeback
To be sure, Spain’s economy has had a much longer road to recovery. The country lost 16% of its jobs during the crisis, a higher percentage than any other eurozone country. Unemployment eventually surged above 25%, and at first glance, the country appeared to have few virtues with which to mount an economic comeback. Yet some of the world’s richest investors subsequently began to make major investments in the country, as I noted back in 2013.
At first glance, any optimism surrounding a Spanish comeback may have seemed premature at the time. When I looked at Spain in 2013, the iShares MSCI Spain Capped ETF (NYSE: EWP) traded for around $38. These days, shares of the fund are worth around $30. So has any hoped for economic renaissance petered out? Not at all.
Spanish economic reforms have led to much less restrictive labor laws. That initially led to a fresh wave of layoffs, deepening a sense of gloom among many Spaniards. But with much less red tape now in place, Spanish companies have slowly begun to start hiring again. In addition, Spanish banks have been recapitalized, and fears of a Greek-style meltdown are no longer on the minds of business leaders.
The net result: the Spanish economy is on pace to grow more than 3% this year. Home prices have finally begun rising and tourism revenues are at record levels. Also, a more competitive currency and falling oil prices are aiding Spain’s trade balances. Economists note that feedback loops can be either positive or negative. In Spain’s case, the early signs of an economic recovery should help provide the fuel for further gains in coming quarters and years.
Risks To Consider: Europe remains heavily indebted, and any fresh economic setback would re-invite the specter of bailouts.
Action To Take: Ireland is a lot further along than Spain on the road to recovery. Investors are compensated for that by the fact that Spanish assets remain relatively inexpensive. The iShares MSCI Spain capped ETF, for example, is valued at around 1.35 times book value, 20 basis points below the global average. The dividend yield of this ETF stands at around 3.8%, compared to the global benchmark average of 3.16%, according to Morningstar. More broadly, both Ireland and Spain have deeply embraced economic reforms, and history suggests that economic reforms boost an economy’s long-term competitiveness.
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