Written by Jose Caireta, Managing Partner, Squircle Capital
Europe’s economy is being left standing by a resurgent US and Asia. In terms of wealth available for investment there is a European north-south divide. Switzerland and Germany added €1tn and €2tn in net household wealth, to their pre-crisis highs. Spain and Greece suffered declines of €1.4tn and €170bn respectively since 2007.
Spanish banks are still deleveraging, the pain in Spain is not over yet. But the economy is strengthening each week. Borrowing costs have fallen to pre-crisis levels. A government current account surplus and surging exports means the economy is better balanced. The bombed-out property market that almost brought down the country’s banking system is stabilizing as foreign buyers return to the market. Spain’s Ibex benchmark has gained 26% since the start of 2013 with banking stocks amongst the biggest risers.
Although the country’s megacaps are more confident, medium and small enterprises still find conditions tough, particularly if they don’t have international customers.
Also, there are signs things are easing for them too. Small and mid-sized business (SME) loan rates have fallen. European Central Bank figures show these fell to 4.58% in June, still one percent higher than their German peers, but below the cost of borrowing for Italian smaller companies.
The ECB’s bond purchasing programme has helped, driving down Spain’s 10-year bond costs to 1.94% today. And the recent interest rate cut to a record low of 0.25% has also brought down mortgage rates and corporate loan rates, bringing relief to over-indebted households and companies.
It is however Spain’s businesses and businessmen and women, not the ECB, that have done the most to set the Spanish economy back on the rails.
Spanish companies have implemented no nonsense restructuring – taming wage inflation, slimming their balance sheets, and working harder- and smarter. Spain’s productivity grew 2% per annum between 2008-2012, faster than South Korea, the United States and Japan. Productivity is the key to long term wealth creation and European productivity is stubbornly difficult to improve. Global companies are taking notice: carmakers such as Ford are investing as much as €5billion in their Spanish plants. The industry is on course to build more than 2.3 million cars in 2014, more than in France, and making it the second biggest producer in Europe. Spain has also become a centre for auto parts production. Economists are also taking note: in a 2013 report, Morgan Stanley argued that Spain will replace Germany as the strongman of Europe due to the increasing competitiveness of its exports.
Spain’s bombed-out banks are also repairing their balance sheets, helped by the eurozone’s €40bln bailout. Their largest exposure has come from real estate, but this now looks fully provisioned. Non-performing loans across the industry declined to 14.3% in the second quarter, down from 14.65% at year-end.
Government is helping with a series of bold and tough labour reforms, making it easier to hire and fire staff. In December the OECD hailed those reforms as a success, saying that they had helped to create 25,000 new jobs a month. The latest unemployment data shows the jobless rate dropped to 24.5% in the first quarter- and the economy added 402,000 jobs in the second quarter, the biggest increase in almost ten years.
But it is not all plain sailing. A quarter of the working population remains unemployed- a huge drag on government coffers and consumer spending. The youth jobless rate is more than 50% – in the UK it is 16%. Economists estimate that the country’s total debt- public and private- still stands at three times GDP.
Alongside the stock market other asset prices are starting to tick up. That’s why projects such as a prime residential development has been launched in Barcelona for international investors. And there is a steady inflow of big-ticket names such as KKR, Blackstone and other investors snapping up assets across the country. For investors stuck in a low yield environment, the question has to be not if but when they turn their sights on the eurozone’s standout turnaround economy.