Ireland and Spain: From PIIGS to Market Leaders

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

What a difference two years makes…

Just two years ago, headlines around the world anxiously trumpeted the imminent collapse of Europe and the inevitable implosion of the euro zone.

“The Euro has 10 days at most” warned London’s Financial Times columnist Wolfgang Munchau on November 27, 2011. On Oct. 12, the U.S. stock market shuddered after Slovakia’s parliament blocked a plan to expand its European Financial Stability Facility (EFSF) — the source of crucial bailout funds for a much wealthier Greece.

Fast forward two years, and it’s a very different story.

Permabear Nouriel Roubini owes German Economist Beatrice Weder di Mauro a bottle of Champagne for a 2012 bet they made about whether Greece would leave the euro.

The stock markets of Europe’s problematic PIIGS (Portugal, Ireland, Italy, Spain and Greece) are among the top performers in the world.

Even the broken clock, doom-and-gloom crowd has changed its tune. At last week’s London Money Show, gold bug Peter Schiff gave a talk about why Europe is better off than the United States.

And it is not just sentiment that has changed.

Last Thursday, two of Europe’s PIIGS — Ireland and Spain — announced that each is soon set to exit the economic assistance programs. Ireland was forced to borrow 67.5 billion euros from the International Monetary Fund (IMF) and European Union three years ago. Spain borrowed 40 billion euros to recapitalize its failing savings banks last year. That is all set to change on Dec. 15, marking the beginning of the end of the European crisis.

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Ireland: How Austerity Works

Ireland set itself apart from the rest of the PIIGS by pursuing a policy of painful, but effective austerity. Ireland today has cash reserves of 25.6 billion euros stashed in a kitty called the National Treasury Management Agency. That’s enough to cover the country’s funding needs through the end of 2014.

Although economic growth has hardly been gangbusters, the former Celtic Tiger’s achievements have pretty much met expectations. The crucial banking and construction industries have stabilized. Unemployment has fallen to 13.2%, down from a peak of 15.1%. Ireland’s attractive tax regime — which it never gave up despite pressures from Brussels — continues to attract foreign investment from companies using Ireland as a beachhead to enter Europe.

Like any good student, Ireland has gotten rave reviews from the IMF, the European Commission and the European Central Bank. With a small primary government surplus this year, Ireland should be able to keep its borrowing costs low. No wonder its stock market has soared and borrowing costs have plummeted. What is Ireland’s ultimate reward? Ratings agencies are likely to upgrade Ireland to investment grade next year.

And yet, there are few headlines trumpeting Ireland’s successes. Nor should you expect to see a mea culpa about Ireland in austerity critic Paul Krugman’s column in the New York Times anytime soon. After all, Ireland’s turnaround represents the triumph of fiscal responsibility — a slap in the face to the endless fiscal stimulus crowd.

Skeptics still abound. And sure, the Emerald Isle still has the huge millstone of debt equal to 124% of its gross domestic product (GDP) around its neck. And Spain’s numbers are expected to reach 94% of GDP before falling. But imagine what these numbers would have been had the “spend, spend, spend” crowd of Keynesian economists had their way.

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Europe: Still a Terrific Opportunity for Investors

Veteran hedge fund manager Michael Steinhardt coined the term “variant perception” — the idea that the best investment opportunities occur where the underlying reality diverges from the perception. Those investors who have the presence of mind — and resources — to invest where others fear to tread are often richly rewarded.

“Variant perception” has been the secret to the wealth of everyone from Russian oligarchs — who snapped up cheap coupons during Russia’s privatization program in the early 1990s — to contrarian investor Wilbur Ross who invested in both Bank of Ireland (IRE) and National Bank of Greece (NBG) at the height of the European crisis over two years ago. By the start of 2013, other less-daring hedge fund managers like John Paulson, Seth Klarman, Dan Loeb and James Dinan all had invested in Greece, taking stakes in everything from Greek construction companies to the major Greek banks. But thanks to institutional group think and overzealous compliance departments, it’ll be a while before any of these stocks end up in your favorite mutual fund.

Even in this world of instant information, going against the crowd is tough. Two years ago, headlines in the mainstream media trumpeted the imminent collapse of Ireland. Yet, today’s headlines ignore that Ireland is the top-performing stock market in 2013.

A recommendation in my investing service, the Alpha Investor Letter, iShares MSCI Ireland Capped (EIRL), is up 40.22% year to date.

EIRL_111913

And the Bank of Ireland (IRE) — a recommendation in my trading service Bull Market Alert — is up 173.67% over the past 12 months.

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IRE_111913

With such huge gains, you may think it’s too late.

But you would wrong.

iShares MSCI Spain Capped (EWP) — a current recommendation in Bull Market Alert — has only begun to recover over the past six months.

EWP_111913

And I believe the European banking recommendations in my elite trading service, Triple Digit Trader, are destined for Bank of Ireland (IRE)-style gains as well.

That doesn’t mean these stocks will go up in a straight line. And you can count on your tolerance for wild price swings to be tested.

But with European stock markets now technically oversold and due for a year-end bounce, I’ve already placed my bets.

I recommend you do the same.

In case you missed it, I encourage you to read my e-letter article from last week about the myth of America’s decline. I also invite you to comment about my column in the space provided below.

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I had the pleasure of talking this week with John Allison, president & CEO of the Cato Institute.

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