Europe's FISH economies gasp for growth
For the past couple of years, investors in America (along with the rest of the world) have been panicking about PIGS, or even PIIGS. For as the eurozone woes intensified, the countries of Portugal, Italy, Ireland, Greece and Spain have been in the market spotlight – amid speculation that Greece would leave the euro.
These days, the good news is that the immediate panic over a Greek exit has subsided dramatically. Last week, for example, I listened to some of the most powerful money managers in North America discuss the investment outlook. A year ago, half these investors (who collectively control perhaps $1 trillion) expected one eurozone member to leave in a year; now, that ratio has plunged to one in 10.
Faith that Germany will do anything to keep Greece (and others) in the euro, in other words, has soared. Little wonder, then, that some hedge funds have returned to peripheral markets such as Spain and Greece, having left two years ago in a panic. Or as one big West Coast investor says: "Many people in America completely underestimated Germany's will to keep the euro together. That has changed.”
But while that reduction in panic is undoubtedly welcome, what is also striking is that the short-term alarm among big investors has been replaced by something else: a longer-term sense of deep unease about the fundamental growth story, not just in the periphery of Europe, but in the core eurozone too.
As a result, the focus today is not just on the "PIGS”; there is also growing debate about what some traders call the FISH – or the big nations of France, Italy, Spain and Holland.
From some perspectives, focusing on this group might seem odd. After all, bond yields suggest market anxiety about Italy and Spain has receded sharply in recent months, as a result of the European Central Bank's promises of support: 10-year Spanish and Italian bond yields are now about 5.3 and 4.4 per cent respectively, both 200 basis points below their level last summer. And the spreads for countries such as France and Holland never really ballooned dramatically at all, because they were assumed to be so core to the eurozone.
But what worries many American investors is not the risk of short-term crisis, but the long-term structural challenges that are sapping growth, creating the potential for political and economic squalls. On Wednesday, for example, it emerged that in the fourth quarter of last year the "FISH" economies shrank by 0.3 per cent, 0.9 per cent, 0.7 per cent and 0.2 per cent respectively.
That may not look disastrous. But the Institute for International Finance, for example, is now forecasting almost no growth in France this year and further contractions in Italy and Spain. Or as Bill Blain of Mint Capital puts it: "The real danger in Spain is long term... we are looking at another three to four years of economic misery just to get the Spanish economy back into the European Union's 3 per cent deficit to GDP groove.”
Meanwhile, the recent data from France has – as the IIF puts it – proved "very disappointing”, creating "a reason to fear that the weakness will prove to be more lasting”.
Or as one large American investor says: "The competitive problems in France are horrible and current policy is making this worse.”
Even Holland, which has hitherto escaped market attention, remains plagued with structural challenges. "Holland has a property market that is in the process of bursting and the household debt is very high (Holland is four years behind Spain),” SLJ Macro's Stephen Jen said in a recent research note. "The Netherland's residential debt (mortgages) to GDP ratio is 107.1 per cent, compared with 52.4 per cent for Spain and 41.2 per cent for France.”
Many eurozone politicians would undoubtedly dismiss such concerns as more scaremongering; after all, they say, surveys suggest business sentiment and activity in the region is now picking up a touch. But even if these FISH fears turn out to be overblown – which is a big "if” – the key point is this: in the minds of American (and other international) investors fundamental questions remain unresolved about the political and economic structure of the region.
Small wonder, then, that so many North American investors keep pouring money into American bonds or stocks. And no surprise that Japan is now one of the hottest topics for debate among North American money managers, as the big investors search for somewhere outside America to put their cash.
Before Europe becomes a truly attractive investment destination for the big pots of North American money, in other words, it will need to scotch those slow-burn fears about the FISH. And sadly that might prove as hard as quelling last year's panic about PIGS – if not harder.
Copyright the Financial Times 2013.