Economies such as Spain and Ireland performed much worse during the global financial crisis, with investment returns generally tallying this trend. However, over the past 24 months, those peripheral economies that have enacted dramatic reforms have started delivering better equity market performance compared to their core counterparts such as Germany and France.
Dramatic reforms paying dividends
Last year saw a Phoenix-like resurgence in interest for European equities, with an interesting mix of winners and losers. The equity markets of Greece, Finland and Ireland performed best while the UK, France and Italy performed worst.
Germany, the Netherlands and Spain were somewhere in between. What can we glean from this? Generally speaking, those economies that have enacted the most dramatic economic reforms have delivered better equity market performance. Despite significant external pessimism about Europe’s ability for self-help, it has begun to work.
The poster children of the eurozone reforms are certainly Spain and Ireland and both have exited their troika programmes. Spain can easily finance itself in open markets, and Ireland has recently conducted its first bond sale since the bailout. Unit labour costs, a good proxy for competitiveness, have fallen significantly from their peaks in both countries. Perhaps more importantly, their employment is now growing. Irish GDP saw a clear rebound, with particular strength in building and construction and investment in machinery and equipment.
Hollande admits to being 'overtaxed'
In contrast, the economies of France and Italy remain troubled. President Hollande recently conceded that France is overtaxed. Here is a socialist leader effectively calling for tax cuts and a slimming of the (very bloated) state sector. The country’s unit labour costs are flat.
Italy remains a curious mix of reasonable economic data coupled with possibly the most baffling political situation in the developed world. The lack of strong government certainly hinders Italy’s ability to reform – despite being the eighth largest in the world its economy has not grown in more than a decade.
The pickup in peripheral economies has contributed to a more positive general sentiment across Europe. In a recent survey, Germans revealed to be more optimistic about the future now than at any time since the mid-‘90s. It also leads us to believe that it is not appropriate to talk about European periphery versus core any more when it comes to economic growth and equity returns.
Economies which instituted the bolder and tougher reforms are now looking towards a significant pickup in growth compared to 2013. We expect this top-line growth to drive improved earnings in 2014, helping them to catch up with other developed markets. Our earnings forecast stands at 10% for this year.
All in all, it looks like the European theme for 2014 will be long sangria and panettone, short sauerkraut and champagne.
