Eurozone: A question of recovery in the periphery

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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.

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SPAIN

While Spain’s GDP keeps growing and flows seem to keep steadily coming
into the fund industry, views differ on whether an actual and sustainable
growth is underway.

Pablo Nortes Planas (pictured), fund analyst at Tressis, sounds particularly positive:
“The Spanish stock exchange has seen its trading volume increasingthroughout the end of last year. It is very satisfying to hear foreign investors ask about your country´s situation in a constructive manner rather than being concerned,” he says.

Nortes Planas also explains that his company has started investing in the
Spanish equity market since Draghi´s call on the euro.

Asked whether fundamentals will pose the real challenge to broader
economic growth, Nortes Planas says: “Fundamentals are already improving. Unemployment is, seasonally adjusted, getting better; the fiscal deficit is reducing and investors’ confidence has increased from the days in which the stability and future of the euro was compromised. A long low inflation period is our main fear.”

However, David Azcona Armiño, CIO at Caja España Fondos is of a different view.

“I see many foreign investors coming to Spain looking for higher dividends or yields without asking too much. They are taking new steps in our country and I really don’t see the same achievement rate they are pointing at.

“It’s difficult to think about further improvement with our unemployment level, no credit increase, no public spending and no structural changes,” he says.

Cesar Ozaeta, analyst at Abante Asesores, points out that the main reason behind the return of flows into mutual funds is to be found in Spanish banks’ cut in interest rates for deposits.

“It is true that the recovery in peripheral markets [for financial products and services] is coming sooner than the recovery in the real economy. This is quite normal as we are witnessing the recovery’s first stages, where the financial assets benefit first and other macro magnitudes later,” he says.

GREECE AND ITALY

A particularly positive and optimistic response came from Athens, where Eurobank Asset Management’s head of Fund Selection Michail Fessas pointed at tourism and infrastructure as the main sectors in which to look for growth this year.

Noting that the company has been invested in Greek assets for the last two years, Fessas says that Eurobank remains strategically overweight in both equity and fixed income instruments since the Greek economy is on a rerating path.

“In equities, we tend to be overweight in banks as this is an obvious leverage play on the economy, plus the fact that following the recent capital increases they are better capitalised relative to their southern European peers.

“We also like public companies that are about to be privatized. Last but not
least, construction companies should gradually outperform as infrastructure
projects resume,” he says.

Looking more broadly at the real economy, Fessas adds: “More importantly consumer confidence is returning, which has led to a significant improvement in household consumption. In Q4, household consumption declined by 0.2% y-o-y compared to -7.8% y-o-y in Q3 and an average of -7.5% over the past two years.”

Providing a view from Italy, senior manager at Euromobiliare Asset Management Paolo De Rogatis says that on the equity side they expect a
continuation of the bullish buying wave in peripheral stocks from foreign asset managers, after the ECB Asset Quality Review is completed.

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