Following Fitch’s upgrade of Greece’s credit rating, ten-year Greek government bond yields fell below 8%, the lowest yield since June 2010. Meanwhile, Italian and Spanish bonds have also rallied strongly and then now yield 3.85% and 4.18% respectively. All these economies are still suffering, but some world-famous hedge funds are already making long bets. Should you go long on any of those economies?
One politically complicated, very rich country
Italy is a rich country. Its $2.1 trillion economy makes it the third economy in the Eurozone, after Germany and France. Its industrial north is indeed an economic powerhouse. But the country’s economy has been stagnated for over 5 years, its population is suffering from a 12% unemployment rate, and there is a political gridlock that prevents the country from necessary reforms. That said, this should be the last year of recession for Italy (the IMF expects Italy’s GDP to contract by 1.5% in 2013), and the first year out of many with a positive current account balance.
A country looking to fix itself
Spain is indeed having a harsh time. Its 27% unemployment rate and recessionary state (the IMF expects Spain’s GDP to contract by 1.5% this year), explain why the Spanish Stock Exchange is up by only 4% Year To Date (YTD). The country is doing necessary reforms, but it will take some time before the Spanish economy thrives as it did in the 90s. At least politics is playing its necessary role to make much needed changes, such as labor and fiscal reforms. Meanwhile, public debt is still very manageable at 80% of GDP.
Despite the still very difficult situation, I would recommend making a bet on one Spanish bank. Banco Santander, S.A. (ADR) (NYSE:SAN), Spain’s biggest bank by every measure, has been fixing itself and its global diversification makes it one of the safest banks in Europe. Santander has been taking steep write-offs on its Spanish portfolio, but it has also been growing its business abroad while solving these problems at home. As a matter of fact, 38% of its ordinary attributable profit comes from Brazil and Mexico, and only 16% of its revenue comes from Spain and Portugal. With a tier one capital ratio of 11.7%, and trading at an estimated price to earnings (P/E) multiple of 12.5 times for 2013 and 9.2 times for 2014, I think Santander is a valid long bet on Spain and Europe. Besides, its 8.6% dividend yield makes waiting a little less painful.
Risks are being underestimated
Greece is still having a tough time. The country has a 27% unemployment rate, and the Greek economy is 16% smaller now than in 2011. That said, the IMF expects Greece to come back to growth as soon as next year, and this has triggered huge bets from the international investment community. As a matter of fact, the Athens stock exchange has rallied more than 11% YTD.
The ETF that represents the Greek Index, the Global X FTSE Greece 20 has also performed well and its up by 10% YTD. The fund, which has been designed to reflect the performance of the twenty largest securities listed on the Athens Stock Exchange, is the only Greek related bet that I would recommend. Even though I think Greece will not leave the Eurozone, I still think that the risks of a new debt crisis remain. With a public debt overhang of 176% of GDP, the Greek economy is still essentially broke.
All of the above being said, betting on the Global X FTSE Greece 20, you will gain exposure to several sectors through companies such as Coca-Cola Hellenic, Hellenic Telecom, the gaming company OPAP and, of course, the National Bank of Greece. Its a risky bet but if you want to go long Greece, I think its the smartest way to do it.
Bottom line
I think it is possible to find compelling single stock investments in all but one of the aforementioned countries: Greece. I think there were fantastic opportunities in Greece earlier this year, but now the prices of some assets seem high for the risks one must take. Italy and Spain are a different story. They are both stronger and more diversified economies, and there are some companies within those countries that I think do represent good investments.
The article Italy, Spain, And Greece: Are There Any Opportunities? originally appeared on Fool.com and is written by Federico Zaldua.
Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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