In 2008 things got really bad. Stock markets crashed.
From 2010 to 2012 things got really bad again. This time it was in Europe. Stock markets crashed.
It appeared the end of Europe’s economy was nigh. Your editor even wondered if the European Union and the euro currency would survive.
But both have survived. And not only that, but despite the cries of impending doom for Europe there’s now the belief that Europe is already well on the road to recovery.
What happens next…?
First off, it has been a big turnaround.
We’re sure you remember all the stories about the PIIGS a few years back. That reference is to the initials of Portugal, Ireland, Italy, Greece and Spain.
It was a somewhat unkind and demeaning reference. It was usually tied in to stories about southern Europeans (except Ireland of course) being good-for-nothing layabouts, and that a financial crisis was what they deserved.
There was a justification to some of the arguments. But pinning the blame on ordinary folks wasn’t fair. Their nations’ governments had promised a bunch of welfare goodies in return for nothing. Who wouldn’t gladly accept that?
Many Europeans did gladly accept that deal. That’s why they got so angry when it all came to an end. Remember the riots in Athens?
The ‘good old days’ of financial crises
But times have changed since Greek rioters were burning bank buildings just a stone’s throw from the Parthenon.
And it seems a century ago that Europe appeared to be on the verge of civil war between the supposedly thrifty north and the spendthrift south.
You only need to look at a five-year chart of the yield for Portugal’s 10-year bond to see how much things have changed:
Did Portugal’s 10-year government bond rates really spike to above 15%? Yes, they did.
That was during the period of time we mentioned above, when Europe was on the brink of collapse.
But since then the bond yield has gone in pretty much one direction — down. Today Portugal’s 10-year government bond yield is just 3.63%. Of course, that may not mean much unless we compare it to something else. Check out the next chart:
It’s a comparison of Portugal’s 10-year bond yield (orange) with Germany’s 10-year bond yield (green).
Ignore the numbers on the left and right. They don’t relate to the interest rate, they are simply index points, with zero being the starting point for the chart.
But you can see what happened. From 2010 through to 2012 the bond yield on German government debt dropped, because investors saw it as a safe haven investment. They sold Portugal’s debt (causing rates to rise) and bought German debt (causing rates to fall).
It’s a neat diagram demonstrating the mentality of investors at the time.
Amongst the rubble and trouble, opportunities exist
But what has happened since the European debt crisis in 2012 is equally interesting. During that time the German bond yield has steadied and even risen slightly. By contrast Portugal’s bond yield has sunk to the current level of 3.63%.
Why? It shows you that since then investors have embraced taking risks again — partly through choice and partly through force, as they have to accept more risk for lower returns.
Investors haven’t only snapped up Portugal’s government bonds. Investors have bought into the country’s stock market too.
Since early 2012 Portugal’s PSI 20 index has gained 64.5%. That beats the US market’s 41.9% gain, and it trounces the Australian share market’s 34.4% gain over the same timeframe.
But you probably haven’t heard much about that in the press. The PIIGS story got less interesting for the press as the country’s interest rates fell, the stock market began to climb, and rioting in Europe died down.
But the good news for Portugal doesn’t end there. It appears that Portugal is about to shut the book (at least for now) on its troubles as it officially exits the three-year 78 billion euro European Union/International Monetary Fund bailout.
Who says a financial crisis can’t have a happy ending?
Look, as always this isn’t about declaring the bailouts a success. Portugal isn’t really out of trouble. It has just cut its budget deficit. But it’s still running a deficit, which means it needs to raise taxes or go further into debt.
If you need proof, Portugal’s Debt to GDP will be 129% this year, compared to 108% in 2012. In other words there’s an element of ‘smoke and mirrors’ to Portugal’s recovery.
But that’s not important. The important message is that if you want to make good money in financial markets you often need to look past the headline in order to find the opportunities.
Two years ago few spotted the opportunity to invest in Portugal due to the fuss about bailouts and budget deficits. That was a mistake. Today we see investors making the same mistake as they worry too much about events in Russia, Ukraine, China, and even here in Australia.
The world economy isn’t perfect right now. But if you’ve learnt one thing over the past few years it should be that you don’t need a perfect world in order to make healthy returns.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Secure and Protect Family Wealth for Generations
