European equities, in particular Spain and Italy have both been very much poor performers over the last ten years. While other European indices like the Dax and even the FTSE have managed to rise substantially, the FTSE MIB and the IBEX paint a picture of distinctly sluggish performance – it is rare for markets that underperform over 10 years to subsequently do so over the next successive 10 years – Japan excepted! Are we now on the cusp of a multi-year bull run in Europe?
The IBEX has been severely hit while Spain’s GDP growth was in fact very healthy during the period between 2003-2012, rising 14% and outperforming the Eurozone (which grew 10%) but trailing the US (growing at 17.5%). It is rare for a mismatch of GDP growth and equity valuations to be so disjointed.
The financial crisis has led to increased speculation in the debt markets of peripheral Eurozone countries that they are at unsustainable levels and likely to require serious restructuring or large money printing by the ECB to soak up the debt excess. This has pushed yield spreads higher and consequently dragging share prices down. Given the imminent ECB intervention in the Spanish debt markets should Rajoy finally hold out his arms for help, see link here where we recommended a long position in European equities, in Italy and Spain. It is now time to evaluate how things evolved since our recommendation at 31 July after near 20% gains.
The table below shows the respective performance of the IBEX, FTSE MIB and also for the Dax and the S&P 500. Since our recommendation, the IBEX was the best performer, rising 17.1% and the FTSE MIB also gained a healthy 12%, while the DAX and the S&P gained a more modest 7.7% and 5.6% respectively.
For those punters lucky enough to time their long position on the 24th July, the performance for these markets would have been much better, since they bottomed on this date. In fact, near 30% returns would have been enjoyed in Spain. Nevertheless, we still got some good love out of our trade with Draghi’s comments on 26 July changing decisively the direction of European equities and triggering a good opportunity to enter these equities with a long position whilst at the same time minimising the risks.
The chart below shows performance for IBEX and FTSE MIB since the beginning of the year.
Legend – Black & Red – FTSE MIB Blue – IBEX 35
We can clearly see that in March both the FTSE MIB and the IBEX entered a major downtrend such that even after the huge rise experienced over the last two months, these indices still aren’t in positive territory for the year. Spanish & European equities kicked of a cyclical bull run and the trend was confirmed when Draghi finally announced an asset purchase program at September 6. It seems investors were satisfied this was the real things and that the Eurozone leaders would get behind Draghi and not let Europe and the Euro sink into the abtss. With the help of Ben Bernanke and his magical QE3 infinity package announced a few days later, equities continue their bullish trend today.
There is however still much to do in Europe to solve the sovereign debt problem but large steps have been taken during the last few months to at least pave the way for a final solution. Equities will experience some turbulence, with ups and downs but Italy and Spain are still two equity markets to invest money for the recovery and to hold for the longer term. The recovery experienced in the last two months is still nothing if we look at the big picture. For short term traders, we still think it is not the right time to sell those equities. The last few months of the year are usually positive for equities, and with the little help of our friend from the other side of the ocean, Ben Bernanke, the risk-on trade may continue to drive equities higher.