Eurozone: A question of recovery in the periphery

For fund selectors based in the eurozone periphery, the pace of recovery takes on significant additional meaning as both local and foreign investors wonder if the improvements seen thus far will stick.

Towards the end of last year, there were signs of improvement coming
from the eurozone; GDP was up by 0.3% in the last quarter of the year while inflation seemed to be steady if a little below target.

Exports pushed GDP up in Germany (+0.4%) and France (+0.3%); Italy had finally returned to growth of +0.1%; while Portugal and Spain saw their economies grow respectively by 0.5% and 0.3%.

In particular, it was the European periphery that seemed once more to start offering interesting yields from fixed income through 2013.

Then, at the start of the second quarter of 2014, further good news came from the periphery that boosted investor confidence in the area. Greece, the country hit most by the euro crisis, executed its first government bond sale in four years.

The move reaped €3bn in a five-year bond deal after attracting in excess of
€20bn in orders, with a yield of 4.95%. Appetite for the Greek debt
triggered an increase in demand for other European government bonds,
with the yield on 10-year Italian bonds down 5 basis points to 3.15% and the yield on Spanish 10-year bonds down 4 basis points to 3.16%.

Meanwhile, Portugal was set to end its €78bn bailout programme in May; while Ireland, which exited its bailout programme in December last year, raised €1bn in April in its first government bond auction since September 2010.

However, results from the first quarter of 2014 proved to be less encouraging than expected, with eurozone GDP going up by just 0.2%, half the 0.4% forecast by analysts.

The only eurozone economy that reported a significant growth rate was Germany, whose GDP went up by 0.8% over the period.

In light of these results, investors were left wondering whether a recovery is actually underway in Europe and if European periphery debt and equity remain attractive asset classes.


Regardless of market whims, professionals on the ground tend to have a
steadier view of what is actually going on. Selectors polled by InvestmentEurope seemed to have a positive feel of the recovery underway in Europe’s periphery.

From Portugal, both Hugo Soares, associate portfolio manager at BPI Gestão de Activos and Paulo Gonçalves, manager of the Financial Assets Team at Banco Popular Portugal say they have seen the signs of recovery over recent months, but are more cautious on fundamentals.

“I see inflows in the market, which I hadn’t for quite some time. Also, we
are starting to see again some more reasonable spreads for housing credit,
which propels some movement on the real estate markets, which had long been stagnant as well,” says Soares.

“However, not much has fundamentally changed. The debt is all still there to be paid for and we can hardly see any growth in the economy. In the short run however, I won’t be putting my chips against Draghi.”

Gonçalves has seen signs of a recovery showing in both the fixed income and equity markets in Portugal, but warns that it will take years for the broader economy to stabilise.

“The situation should take at least four-five years to normalise. In the
Portuguese market, we are currently invested both in equities and bonds
but we have been reducing our investment in bonds due to the cut in interest rates, which has been sudden and significant in making investing
in Portuguese bonds no longer attractive,” he says.

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