Which of Europe’s PIIGS is the #1 Stock Market of 2013?

Nicholas Vardy

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

Even as the U.S. stock market struggled to find its footing during the past two weeks after a strong July, a handful of other stock markets in the world have continued their blistering rise into August.

Foremost among these star performers are Europe’s crisis-ridden “PIIGS” — Portugal, Italy, Ireland, Greece and Spain.

That news may come as a big surprise, since only a year ago, pundits were predicting Greece’s imminent exit from the euro.

Wall Street’s strong performance so far in 2013 — combined with the lousy performance of global stock markets — has shifted attention away from the PIIGS.

But seasoned investors know that the best investment opportunities occur at turning points — when things start going from “bad” to “less bad.”

And after their strong performance of the last six weeks, they also are starting to wonder whether the PIIGS have turned the corner.

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Ireland — The #1 Stock Market in 2013

As I have written before, Ireland is Europe’s poster child for the success of austerity.

Government budget cuts, banking reforms and robust exports have helped Ireland become the only economy among PIIGS that has returned to growth. The country’s Gross Domestic Product (GDP) expanded by 2.9% in Q1, though weak exports have caused estimates for 2013 to slip back to 0.7%.

That has not kept Standard & Poor’s from upgrading Ireland’s outlook from “stable” to “positive,” noting that Ireland could “over-achieve” its fiscal targets and reduce its government debt faster than expected. After many years of painful stabilization, Ireland is six months ahead in its schedule to exit from a 67.5 billion euro ($88 billion) bailout program.

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The performance of the iShares MSCI Ireland Capped Investable Market Index Fund (EIRL) — up 27.58% in 2013 and a current recommendation in my Alpha Investor Letter investment service — has made Ireland the top-performing global stock market in 2013 among the 39 global stock markets I track on a daily basis.

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But an even better performer has been Bank of Ireland (IRE) — a recommendation in my Bull Market Alert trading service — which has soared 112.38% over the same 12-month period.

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Prospects for the Other PIIGS.

Italy

Italy’s famously inefficient government, a fractious politics and Southern European reluctance to embrace austerity have long weighed on its stock market.

Current Premier Enrico Letta has made bold promises to turn around the economy in 18 months by reforming electoral law, suspending a property tax, and cutting ministers’ salaries.

Italy’s economy contracted less than expected in the second quarter of 2013, a sign that the euro-zone’s third-largest economy is poised to emerge from its longest contraction since World War II.

Investors are taking heed, with iShares MSCI Italy Capped Index (EWI) surging 10.03% in July and up another 4.69% in August buoyed by expectations the Eurozone’s third-largest economy will finally start recovering in 2014.

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Greece

If you ever want to empty a room at an investment conference, tell your audience you recommend investing in Greece.

After all, it’s hard to find an economy with a worse reputation. Greece’s unemployment stands at 27% and youth jobless rates have hit 65%. Germany’s Bundesbank recently stated that EU governments will “certainly agree a new aid program for Greece” by early 2014.

Yet Greece is now track to produce a budget surplus this year before interest payments. Gross domestic product (GDP) for Q2 showed a contraction of 4.6% less than the 5.0% forecast.

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Most importantly, Greece has made money for investors, with the Global X FTSE Greece 20 ETF (GREK) rallying 59.69% in over the past 12 months, substantially outperforming even iShares MSCI Ireland Capped Investable Market Index Fund (EIRL). Much of that has come over the past six weeks, with GREK jumping 6.19% in July and soaring 11.54% in August.

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Spain

With youth unemployment hitting 25% and the economy 7% smaller than it was in 2007, it’s hard to make a bullish case for the Spanish stock market.

Yet, much like his counterpart in Italy, Spain’s prime minister insists his country is on the verge of exiting its two-year recession.

Spain’s economy has steadied and it is improving. GDP fell by just 0.1% in Q2 — the slowest rate of decline in almost two years. Unemployment dipped by 1% to 26.3%. The country’s Purchasing Managers Index (PMI) stopped contracting in June and remained steady in July. Spain may be on track for a return to economic growth in the second half of the year.

Investors have taken notice, with iShares MSCI Spain Capped Index (EWP) soaring 12.96% in July alone and rising 3.84% so far in August.

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Profiting From the PIIGS

Despite their strong recent performance, PIIGS stock markets are clearly a contrarian bet.

And it is important to understand that each of the PIIGS differ in important ways.

First, Ireland offers a case study of how a country’s stock market can rally when it gets the basics right. That is why I hold both the iShares MSCI Ireland Capped Investable Market Index Fund (EIRL) and Bank of Ireland (IRE).

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Second, both Italy and Spain may be on the cusp of an economic turnaround, which could signal big gains in their stock markets ahead. I will be keeping a close eye on both through the iShares MSCI Italy Capped Index (EWI) and iShares MSCI Spain Capped Index (EWP).

The big question is Greece. Any sustained turnaround in this market would offer the biggest upside. That’s why I have a small — and profitable — position in Global X FTSE Greece 20 ETF (GREK).

The bottom line?

The PIIGS beside Ireland need to get their economic act together. If they do, they will rank among the top-performing global stock markets over the next 12 months.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

P.S. Join me later this week for the San Francisco Money Show, Aug. 15-17, at the San Francisco Marriott Marquis. There is no charge for this conference and you still have time to sign up as a walk-up attendee. Just stop by the Money Show’s registration desk at the Marriott Marquis Hotel in the North Yerba Buena Foyer and mention code #031736. I look forward to seeing many of you there this Thursday and Friday. This is the first time I’m returning to the Bay Area in four years. I’ve got a busy schedule with four presentations at the Money Show itself, as well as an appearance on CNBC Asia.

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