Sell Madrid, buy Berlin

For some years now it has been fashionable for fund managers investing in Europe to consider the entire Eurozone as one great big market divided up not by national boundaries but by industry. They see the choice not as between investing in Spain or in Switzerland but between, say, pharmaceuticals and retail. And when asked if Europe is expensive or cheap they won’t tell you that one country is cheaper than another; they’ll tell you the price-earnings ratio for the zone as a whole. This all sounds very modern and clever but I wonder if it really makes sense. It is becoming increasingly clear to me that they might actually be better to look at investing in Europe the old-fashioned way, country by country.

Seen as a whole, Europe looks like a perfectly good place to put your money. It grew 2.7 per cent last year and most forecasters have it doing much the same this year — better than either the US or the UK are likely to do — while the average price-earnings ratio across the zone is a respectable 14 times and dividend yields are rising nicely. But it’s also clear that the fortunes of Europe’s national economies have diverged significantly. Take Spain: low interest rates have allowed household debt to rise by over 250 per cent in the last ten years and have fuelled a massive and highly speculative property bubble: property and construction now make up around 18 per cent of GDP. This has been less of an economic miracle than a ‘debt-fuelled binge’, as one analyst put it.

And binge is now very obviously turning to hangover: the recent vicious sell-off in Spanish property and bank stocks was probably just the beginning of something much nastier.