Old Europe's New Shine
By Carl Delfeld, Fri Dec 9th
As European Union leaders meet in London to wrangle overEuropean Union budgets and the Anglo-Saxon versus the Frenchmodel, global investors have already voted and have beenhandsomely rewarded.
Many American investors seem to have written off Europe as aquaint low-growth low-return destination. This sort of attitudehas caused them to miss some great opportunities. Let's look ata few.
Ireland was always seen as on the fringe of Europe. Itspopulation of 4 million people (the United Kingdom is 15 timeslarger) was always viewed as a bit of a laggard. Into the 1960s,citizens had to pay for secondary education, and as late as1987, Irish gross domestic product was only 69% of the averageof the nations that eventually formed the EU. The unemploymentrate was 17%.
Suddenly, its economy took off. Average GDP growth rates in the1990s were 6.9%, and by 2003, Irish GDP was 136% of the EUaverage with an unemployment rate of 4%. How can we account forthis remarkable turnaround? As usual, it is not due to oneevent, but rather to a confluence of policies, timing andaction.
In the late 1980s, a grand deal was struck: Labor would moderateits demands, freer trade was pursued and corporate tax rateswere brought down to zero for multinationals investing inIreland. Education was also noticeably improved for itsrelatively youthful population, especially in the technologyarea.
Within a short time, Ireland became the low-cost production basein Europe, and the money flowed in. Foreign direct investmentwas the key, and now 1,100 multinationals - many in the techsector -established manufacturing and R&D operations in Ireland.More than 25% of all American investment in Europe goes toIreland and Dell is its largest exporter. This, in turn, led toan export boom. The stronger economy also sharply increasedlabor participation, especially among Irish women.
The resultant rise of Dublin as a booming city and a majorfinancial hub also led to a tourist boom with more than 6million annual visitors. Instead of talented Irish workersmigrating to the U.S. for opportunities, they were coming homein droves.
You can see how every action spins off and helps build sustainedgrowth and momentum. Every action led to another in a virtuouscycle, but the key ingredient for success was undoubtedlymassive inflows of capital - capital from foreign directinvestment, from EU subsidies, from exports, from strongerdomestic capital markets and from migration. Good pro-growthmarket policies together with sizable amounts of capital canlead to economic miracles.
The challenge for Ireland now is to maintain its competitivenessand momentum in the face of greater competition and higher costsplus a potential
property bubble. Congestion in Dublin, whichrepresents 33% of the population and 40% of GDP, is a bottleneckon growth.
The New Ireland Fund is a closed-end fund that has done quitewell. Over the last ten years, it has an average annual returnof 13%, and during the last year, it was up more than 35%. Ittrades at a 10% discount to its net asset value and is managedby the Bank of Ireland
Next, let's take a quick look at the host of this week's EUsummit, the U.K., which has benefited greatly from its opennessto the world. London has grown in the last 20 years by 800,000to reach almost 7.5 million. There are 300 languages spoken inLondon, and the number of nationalities is approaching 100. TheU.K. is one of only three European countries, together withSweden and Ireland, that have given workers from Eastern Europefree access to its labor markets. Since last May, 175,000 haveaccepted the invitation. The iShares MSCI United Kingdom Indexis up 12% over the last 12 months.
While the American discussion of the flat tax doesn't seem to goany further than the local Starbucks, many of the countries ofEastern Europe have already adopted one. The flat tax, combinedwith Eastern Europe's low cost structure, access to new EUmarkets, and a strong work ethic have led to a surge in growth.Because Eastern European stock markets are thinly traded, whynot use the iShares MSCI Austria Index as a proxy? Austriaserves as a gateway to Eastern Europe and functions as itsfinancial, transportation and logistical hub. Austria has alsocut its corporate tax rate from 34% to 25%. The Austrian ETF isup 40% over the last 12 months.
Germany's GDP growth has been anemic, but the iShares MSCIGermany Index is up 16% during the past year. The reason, firmssuch as ABB and Siemens are not waiting for the politicians totell them what to do. They are searching the globe foropportunities and winning big contracts.
Even the broadest European indices are doing well. The iSharesMSCI EMU Index is up over 15%, and the iShares S&P Europe 350Index is up almost 16% during the past year. By comparison, theS&P 500 is up a little better than 6%.
Don't buy into the media's no-growth, no-opportunity label forEurope. It has some of the world's best multinationals andcontrols 40% of the world's wealth. Especially as U.S. marketscontinue to churn without making any forward progress, a newinvestment in "Old Europe" could be a wise move for yourportfolio.
About the author:Carl Delfeld is head of the global advisory firm ChartwellPartners and editor of the the "Asia-Pacific Growth" newsletterand is the author of "The New Global Investor." For moreinformation please visit http://www.chartwellasia.com
