Europe: Where might investors profit?

2nd May 2012

It seems there is – if you've got some nerve. Consider the Icelandic story, for starters. In the five years to 2008 Iceland's banks went wild, buying up masses of assets, and the population followed – leading to a dramatic meltdown.

The banks went bust, but they didn't get bailed out, and the country only agreed to protected domestic depositors. The stock market was decimated along with the Icelandic Krona.

Yet while inflation destroyed consumers' purchasing power, unemployment remained relatively low, and growth recovered. A few years ago saying that Iceland was a good economic example would have brought amused sniggers, but who's laughing now?

So what's happening with Iceland now? 

Iceland technically defaulted on its debt, and has made a remarkable recovery. While much of Europe wallows in recession, the economy is growing at a pace that has surprised many people, thanks to a currency fall, says Reuters.

Not all is rosy, however. As Moneyweek puts it: "It's at the centre of an international dispute; one of its former leaders has recently been tried in court for actions taken during his reign; and the stock market is down 90% from its peak."

So the country isn't in great shape yet. But: "The government continues to run a deficit of 4.4% of GDP… if you exclude interest payments, the primary deficit is a tiny 0.5% of GDP. And Iceland has managed to cut spending from 51% of GDP in 2010 to 46.1% in 2011. This shows that the political will for a balanced budget exists."

Meanwhile, ratings agency Fitch has praised Iceland's consolidation as "robust", saying the deficit should turn into a surplus by 2014. Fitch also predicts that "barring further shocks, Iceland should see a sustained reduction in its public debt/GDP ratio from 2012".

Iceland is also sitting on vast assets in the form of natural resources, with geothermal and volcanic resources mean that the tiny nation has a great deal of cheap power. Its fishing industry is poised to benefit from higher prices as the World Bank fears that there could be a fish shortage.

What about other countries that are also surprising winners?

Poland is, by some measures, the strongest economy in Europe, says this report by the OECD. While eurozone members such as Greece and Italy leveraged themselves to the hilt, Warsaw has been assiduously implementing rules so that one day it, too, could join the euro.

In 2008 and 2009 Poland was the only country in Europe whose economy didn't shrink. It has low debt, a young, educated workforce and is now creating new jobs faster than virtually everywhere else on the continent.

There is also Turkey…

This could be the next country to become a $1 trillion economy, reports The Times (paywall). Until relatively recently, it was a political basket case.

As Sharma notes: "Since the second world war modern Turkey has had, on average, a new government every nine months." But Recep Erdogan, the prime minister nearing his second decade of power, has provided a period of stability and pragmatism.

Government debt has halved, GDP growth has clocked in at 5% annually, and average income has tripled to more than $10,500. "The key for Istanbul is to continue to walk the delicate line between courting western Europe and opening new trade channels with the Middle East, where it shares deep religious and ethnic ties, and where some of the world's fastest growing economies are located," says the report.

The most successful investors spot opportunities where others see problems. And this is the case with Europe – while taking a punt on some of its countries with less than traditional economic ideologies isn't for the faint-hearted, it might prove profitable if you hold your nerve.

 

More on Mindful Money

The Eurozone is a polarised economic model

Down and out in Spain

BRICs, bribery and corruption

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