RenAsset’s Sherman sees recovery in Europe
Jesse Sherman, portfolio manager at Renaissance Asset Managers, answers a Q&A on the recovery in the European periphery.
Stock markets seem to be recovering in the periphery, but fundamentals – e.g. unemployment, public debt levels etc.- seem still problematic. When do you think this situation will start changing?
Despite economic indicators remaining at elevated levels and pointing to challenging conditions, we think the situation in the European periphery is already showing positive signs.
For example in Greece where Debt/GDP remains high at 175%, the annual interest costs are less than €5bn per annum equal to only 3% of GDP. At the same time the country has produced twin surpluses (primary surplus and Current Account) for the first time since the crisis and economists are now projecting modest (0.2%) but real GDP growth in 2014.
Similarly in Spain where unemployment remains above 26%, the country was successfully able to exit from the €100bn ESM programme in January after only ultimately utilising $41bn in support and real GDP growth is expected to be nearly 1% in 2014.
Or even in Poland where the economy slowed to 1.5-2% real GDP growth in 2012 & 2013, expectations for 2014 accelerate from 2.5% last Autumn to 3.1% with a high of 3.6% currently. In our view it is not about when these changes will start as we can already see tangible evidence of improvements, but whether these trends can be sustained in the medium term which would continue to present an attractive environment for investment in the region.
The Greek government has just made its first bond sale in four years. Have you invested in that market recently/are you looking at it?
At RenAsset Management the Greek market has been one of our most prospective geographies over the past year with the economy stabilising and moving towards growth after six years of contraction.
The market’s attractiveness has been enhanced by MSCI re-assigning it as an emerging market from developed in its indices providing it with a more focused and dedicated investor base which it had lost given its immaterial weighting in developed and European indices previously.
As an illustration, the market which was trading roughly €35m on average per day last Summer is currently ranging between €100-150m per day but well off the previous highs pre-crisis of nearly €1bn.
The universe of companies is diverse with over 70 investible companies, many of which are not in the index and inaccessible through ETFs similar to some of our other markets in the Emerging Europe region.
While the Greek market has returned over 70% since the end of 2011 and nearly 30% in 2013, we believe there is significant upside to the market if the government is able to continue to deliver on its reform agenda.
Current elections will likely determine whether the recent economic improvements can be maintained. We remain optimistic that the Greek people will choose to continue on this path and under this scenario the Greek market would remain a highly interesting investment area in the near term.
Looking at today’s GDP figure from Eurostat, do you think a recovery is actually underway in the EU altogether?
We see signs of a recovery in Europe, with many of the countries turning towards growth during the second half of 2013 and an acceleration during 2014. While we believe that the ingredients for sustained growth across the EU is present, the challenge is whether governments can continue to deliver reforms and support as necessary and the global macro backdrop remains improving.
Many of the upcoming European elections will determine whether we continue to see improvement across the region or the positive environment begins to fade.