GAM’s Niall Gallagher sees opportunities in Spain, Greece recovery
Niall Gallagher, manager of the GAM Star Continental European Equity Fund, says recent data points to firm recovery ongoing in Spain and Greece.
The structural position of many of the southern and peripheral European economies continues to improve. Current account deficits have now closed in Spain, Greece and Ireland, and it is encouraging that this has occurred not just due to reduced imports (consumption) but also a very impressive export performance – particularly in the case of Spain.
Primary fiscal deficits continue to contract and Greece is now in a primary fiscal surplus, although there is more work to do in the case of Ireland, Spain and the UK. There is also growing evidence of important structural reform to labour markets and public services in Spain and Greece. All of this suggests that progress continues towards longer-term sustainability and new economic models.
The key issues for the peripheral economies remain deleveraging and excess sovereign debt. Positive progress has been made, particularly in Greece, where the banking system has been fundamentally restructured and the two largest banks are now capitalised to a high level.
The cyclical position of many continental European economies and the UK has also improved over the past few months, especially relative to expectations.
However, while most welcome, this ‘expectational adjustment’ reflects the fact that economists and other commentators had become too bearish about the medium-term prospects of continental economies and the UK. We believe, based on a myriad of conversations with many companies across Europe, that economic activity is picking up, albeit at a moderate level as companies and consumers remain cautious. Given the level of outstanding debt in many economies (including the UK), the need to rebalance economies in some cases (eg, Spain), and the fact that real wages continue to decline, an environment of positive but low economic growth seems likely.
We are sceptical about extrapolating the recent strong UK economic newsflow too far into the future, as it has been based on a reduction in savings rates for consumers rather than any more powerful fundamental drivers. As with much of peripheral Europe, low-to-moderate (but positive) economic growth seems realistic. This has been confirmed in recent company communications and investors should continue to expect a level of cautiousness in consumer behaviour.
European markets have seen a significant rotation towards more domestic and cyclically oriented stocks. This has benefited many European companies, though in some cases this may have gone too far, and both valuations and earnings expectations look quite rich. Conversely, a large number of companies that have fallen out of favour due to their perceived lack of cyclicality, or perhaps due to a more global than local footprint, look increasingly attractive. Investors should seek exposure to sectors such as the automobile industry to take advantage of this mismatched sentiment.