U.S. investors are adding money to European equity markets that suffered the most in the 2011 debt crisis, helping propel stocks from Greece to Italy to this year’s biggest gains.
Benchmark indexes in Greece, Portugal and Italy have surged at least 14 percent this year, posting the best performances by developed markets. Assets increased to $21 million from $1.6 million for a U.S.-listed exchange-traded fund tracking the FTSE Portugal 20 Index in the first quarter, according to data compiled by Bloomberg. Traders added more than $100 million to a security that follows Greece’s ASE Index, while piling in to ETFs tracking indexes in Italy and Spain. Money held in funds that replicate German and French equity gauges dropped.
Stocks in countries along Europe’s southern edge will keep rallying as optimism builds that the economic recovery will lead to higher earnings, according to Sreekala Kochugovindan, an equity-allocation strategist at Barclays Plc in London. Greece will end six years of recession in 2014, while the economies of Italy and Portugal will expand for the first time in at least three years, economists’ forecasts compiled by Bloomberg show.
“Peripheral earnings have had a slower recovery in comparison to Germany, but the improvement is happening,” Kochugovindan said by phone. “As the relative earnings start to play catch-up, this should favor periphery equities.”
National equity indexes in Europe’s periphery remain below their 2007 highs, even though yields on the countries’ sovereign debt have slipped to pre-crisis levels. Portugal’s PSI 20 Index is 44 percent below its 2007 high. The ASE is 75 percent lower than its peak that year, while the Italy’s FTSE MIB Index would have to more than double to return to its high.
The Portuguese gauge rose 1.7 percent today, the most in two weeks, and the FTSE MIB climbed 1 percent, both closing at their highest level since 2011. The ASE gained 0.5 percent.
Banks, which account for a large part of southern Europe’s benchmark indexes, will benefit from the decline in bond yields, according to Pierre Mouton, who helps oversee $6 billion at Notz, Stucki & Cie in Geneva. Lenders make up 29 percent of the PSI 20, 28 percent of the Italian index and 15 percent of Greece’s ASE, according to data compiled by Bloomberg. That compares with 13 percent for the Stoxx Europe 600 Index.
“Those countries have very good companies that were suffering from a huge risk premium,” Mouton said. “I don’t see this risk premium rising again. It could normalize further, so there’s some more way to go for these stock markets.”
Earnings at companies in the Portuguese index will jump 58 percent in 2015 after falling this year, while they will climb 35 percent for Greece’s ASE following a 2014 decline, according to analysts’ estimates compiled by Bloomberg. For those listed on the FTSE MIB, profit will increase 23 percent in 2015 after rising 0.4 percent this year.
As economies in peripheral Europe emerge from recessions, companies will benefit, according to JPMorgan Chase & Co.’s Andres Garcia-Amaya.
“While we don’t expect the recovery to be very strong, when it comes to corporations, there’s a close tie between revenues and their economies,” Garcia-Amaya, a global market strategist at JPMorgan’s mutual funds unit in New York, said by phone. His firm oversees $400 billion. “There are a lot of companies that, when their economies go from growing negatively to positively, their revenues shoot up.”
Italy’s economy will grow 0.5 percent in 2014 and Portugal’s will increase 1.1 percent, according to economists’ forecasts compiled by Bloomberg. Greece’s gross domestic product will stop contracting this year before expanding 1.5 percent in 2015, the data show. MSCI Inc. downgraded Greece to emerging-market status in November.
Assets in the Global X FTSE Portugal 20 ETF rose to $20.89 million from $1.58 million at the end of last year, data compiled by Bloomberg show. Global X Management Co.’s FTSE Greece 20 ETF expanded to $249 million from $132 million and BlackRock Inc.’s iShares MSCI Italy Capped fund increased to $1.3 billion from $863 million. The iShares MSCI Spain Capped fund’s assets grew to $1.6 billion from $888 million.
In the same period, Blackrock’s iShares ETF tracking German equities lost 5.5 percent of its assets and the assets of iShares MSCI France ETF fell by 11 percent.
“We are seeing the flows again,” Larry Kantor, the New York-based head of research at Barclays, said by phone March 25, referring to ETFs investing in Spanish and Italian equities. “They were beaten down for a long time and finally we’re seeing them turn the corner in terms of the economy. Obviously, these markets have bounced, but the recovery still is not fully priced in. We still think it has room to run.”
In the first quarter, the ASE climbed 15 percent, the PSI 20 rallied 16 percent and the FTSE MIB jumped 14 percent. France’s CAC 40 Index has climbed 2.2 percent this year.
Germany’s DAX Index, which rallied to an all-time high on Jan. 17, has risen less than 0.1 percent in 2014. Europe’s largest economy is also the continent’s biggest trading partner with Russia. President Vladimir Putin’s success in annexing Crimea has led both the U.S. and the European Union to impose sanctions against Russian officials, prompting concern that trade could be disrupted.
The DAX also fell from its record as evidence mounted that China’s economy is slowing and its manufacturing weakening.
Peripheral Europe may offer fewer bargains to fund managers, according to Matthew Beesley, who helps manage $125 billion at Henderson Global Investors Holdings. The ASE trades at 22 times estimated earnings and the PSI 20 at 25.5 times. The wider Stoxx 600, which includes the U.K., where equities have dropped this year, has a multiple of 14.6 times projected profit, according to data compiled by Bloomberg.
“Many of these peripheral assets are now priced either at parity or at just small discounts to their less-exposed, more-mainstream European peers,” Beesley said in an e-mail. “With economic challenges still remaining, share-price appreciation from here is going to be less about multiple expansion and more driven by fundamental profit growth.”
For Threadneedle Asset Management Ltd.’s Frederic Jeanmaire, equities from Europe’s periphery have more to rally.
“I still quite like the periphery,” Frederic Jeanmaire, who helps oversee the equivalent of $146 billion at Threadneedle Asset Management Ltd. in London, said by phone. “The indices of these periphery countries are very focused on domestic stocks. These stocks haven’t seen downgrades, while more international companies have.”