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PIIGS Fly! Stock Market Prices in Europe Take Off

The stock market prices of PIIGS in particular are displaying very strong growth in 2017. And this boom may continue despite, or even because of, the rising euro. 

Pigs don't normally fly. "PIIGS" – an acronym coined during the 2010 euro crisis for Portugal, Italy, Ireland, Greece, and Spain – are doing it anyway: In 2017, they were among the strongest stock exchanges in the world.

Since the euro is firming, investor interest may rise even further. This is because, first, these countries are less dependent on exports than on their domestic markets. Second, the recovery of their banking and real estate sectors is not yet complete, and third, their valuations seem comparatively attractive. 

Figure 1: PIIGS fly (in CHF)

Figure 1: PIIGS fly (in CHF)

Source: Thomson Reuters, Credit Suisse 

Figure 2: PIIGS fly (in USD)

Figure 2: PIIGS fly (in USD) 

Source: Thomson Reuters, Credit Suisse 

Market Prices Are Recovering after the Crises of Recent Years

Five years after Mario Draghi’s famous vow to do “whatever it takes” to save the euro, much has transpired. Since then, the European Central Bank has bought up more than EUR 2.3 trillion in bonds, thus creating breathing space for all, but especially peripheral countries, to recover from their real estate, bank and economic crises.

Recent impressive growth figures from the eurozone illustrated the sweep of Europe's recovery: the strongest quarterly increase since 2011. This was the seventeenth consecutive quarter to post positive growth. The latest Eurostat economic report documented in detail the simultaneous upswing in manufacturing, tourism, exports, labor markets and confidence indicators. Since the beginning of the year, the FTSE Euro 100 has had a big lead on the US stock markets.

Formerly Weak PIIGS Are Displaying Particularly Strong Growth

The former black sheep of the European Union (“PIIGS”) made an excellent impression: the second largest of these economies, Spain, expanded by +3.6 p.a. in the second quarter, according to Eurostat – three times more than the UK and nearly twice as much as France. It was the fifteenth consecutive quarter of positive growth for Spain. And 2017 is set to be the third successive year with reported expansion of over +3%.

Spain is the most dynamic of Europe's large economies. Its earlier current account deficit of EUR 54 billion has been transformed into a current account surplus of more than EUR 20 billion. The country is Europe’s second-largest auto manufacturer. Its exports are broadly diversified among services, pharmaceuticals and tourism. Ironically, the Spanish purchasing managers’ index recently dipped due to commodity shortages. Otherwise, reported growth would have been even more dynamic.

Tourism, which accounts for 11% of Spain's economy, expanded by +12% in the first half of the year. In a global comparison, the Spanish stock exchange is in eighth place this year, just behind Greece (+30% in USD). With forecast earnings growth of +11% and an average P/E of 13.7x, the country could stay in high favor with many investors.

Confidence in the Economy Is Driving Market Prices in Portugal

In Portugal, popular confidence in the economic outlook is higher than ever (since Portugal’s office of statistics began keeping such records). Consumer confidence has also risen over the last few years to the highest level in a long while. For good reason: Portugal too is reporting the strongest growth rate of the last 20 years. At +2.8%, it is well above the rate in the eurozone.

Exports, tourism and increasing investments from abroad are transforming the country. Mario Centeno, Portugal’s experienced finance minister, expects growth to exceed +3% in the fourth quarter. Even the Portuguese budget deficit, at –2.1%, is for the first time appreciably below the stability threshold of 3% established by the European Union. This is why the European Council closed all disciplinary procedures against the country this year.

It appears to be only a matter of time before Portugal’s credit rating receives an upgrade, which is also indicated by recent price gains on government bonds. With its strong stock market performance, Portugal is one of Europe’s rising stars.

Tourism in Greece and Banks in Italy Are Causing Stock Exchanges to Climb

While Greece and Italy are still grappling with large-scale reforms, their stock markets are also among the world's best-performing in 2017. Naturally this is partially due to the statistical base effect. However, Greece is profiting not only from a boom in tourism, but also from the tentative progress of its reform program. The most recent return to the capital market, subsequent to this progress, was an encouraging success. Foreign capital is also back, seeking investments in Europe’s crisis-stricken cradle of democracy. This is unequivocally a milestone for the eurozone as well.

In Italy, the structural challenges continue to exist. Nonetheless, this is a prime example of a market rallying when the challenges appear the greatest. In particular, Italy’s banking sector has seen stock prices soar. “There's life in the old dog yet!” And since necessity is the mother of adaptability, even in Italy sentiment is shifting to favor more private sector and less public sector.

The decision – doubtless owing to necessity – not to privatize the beleaguered Alitalia airline illustrates this change in perspective. Who knows how much more of a tailwind could lift Italy if it also elects a Europe-friendly government next year?