Swelling budget deficits and widening trade imbalances in Portugal, Ireland, Italy, Greece, and Spain have earned these nations the unflattering name "PIIGS," as well as mostly negative outlooks from the major credit-rating agencies. Bad publicity and elevated risk have caused equity investors, fearful of another liquidity crisis, to sell off holdings. That has pushed down prices, creating buying opportunities for those who know where to look. Here are some industries and companies that fund managers familiar with these countries say they're hanging on to—and some they're avoiding.
The situation in Greece is dire, as you can tell from the Athens Stock Exchange General Index, which has lost about a third of its value since peaking in October. But T. Rowe Price's Tenerelli doesn't expect the country to default on its debt and has about 2.5% invested in Greece. "It is a great time for buying quality companies that don't have a lot of debt and have good business models." He likes National Bank of Greece, one of the few banks, he says, whose loans don't exceed deposits. Tenerelli also likes toy retailer Jumbo, which trades at about 10 times earnings.
One-fifth of McKee International Equity's (MKIEX) portfolio is in stocks from PIIGS countries, and half of that is in Spain. Manager William Andrews likes Telefonica (TEF), citing significant sales coming from Latin America. He says it would be a mistake not to invest in companies just because they come from a PIIGS nation. "I think the market is a little too fixated on the PIIGS." He's bearish on any European company whose bottom line is hugely dependent on the Continent. The fund's top holding is Banco Santander (STD), which gets more than half its profits from outside the euro zone. Not in the fund: Spanish construction companies.
Stocks in Ireland seem little affected by the nation's economic turmoil—so far. The Irish Overall Index is flat for the year, while the MSCI index that tracks Europe is down 2%. T. Rowe Price European Stock (PRESX) manager Dean Tenerelli explains that Ireland is trying to solve its problem the "hard core" way with big budget cuts. "It means their economy will slow down dramatically," he says. That could suggest a sluggish stock market.
Want to play anyway? About half of AIM European Small Company Fund's (ESMAX) 8% Ireland stake is in DCC, a holding company with investments in food, energy, and health care.
Portugal's primary equity index is down more than 10% since its Jan. 8 high, as is the stock of Energias de Portugal (EDP), which makes up more than 15% of the index. Yet EDP's prospects are good, given strong subsidiaries operating in Spain, Portugal, France, and Belgium, says New Alternatives Fund (NALFX) manager David Schoenwald. About 5% of his holdings are in EDP's alternative-energy subsidiary EDP Renováveis (EDRVF). At 3.5% of holdings, the highly rated Columbia International Value Fund (EMIEX) has one of the biggest stakes in Portugal, according to Morningstar. Its No. 2 holding is Portugal Telecom (PT).
A report published by Italian investment bank UniCredit on Feb. 5 argued that there is one too many "i's" in PIIGS, because even though Italy has a large amount of debt, the country has a high private savings rate and good finance management. MainStay Epoch International Small Cap (EPIEX) manager Emily Baker tends to agree, noting that Italian companies make up about 8% of total holdings right now. "The fear is overdone," she says. The fund owns railway and subway builder Ansaldo STS, which collects more than 50% of revenues from outside Italy and has a strong backlog of orders. European banks, however, are not in the portfolio.