Mediterranean Renaissance

Italy, Spain, and Portugal regain economic splendor in the new Europe

They're known collectively as "Club Med" among stock analysts, but the stock markets of Italy, Spain, and Portugal have lately shed their tendency to dawdle and dally.

Markets in the three southern European markets today have more zip than a Nordic ski jumper. "Club Med" stocks have soared in recent months, and their upward path points to high long-term returns, equity analysts say.

"Southern Europe is booming and outperforming all of Europe," says Daniel Bennett, director of Finantia Brokers in New York. But investors should wait until a minor correction calms these overheated markets, analysts say.

"Let them come off a bit, and then jump in," Mr. Bennett suggests.

If East Asia currently epitomizes the hazards of international investing, then the three southern European markets highlight the opportunities. From Jan. 1, 1997 until Feb. 4 of this year, Spain has risen in dollar terms by 36 percent; Italy by 53 percent; and Portugal by 74 percent.

Safe from Asia

The markets in recent months have lured a torrent of money from international investors seeking comparative safety from Asia's financial turmoil. Portugal and Spain are especially well insulated, since they don't export or invest much in Asia.

They have also gotten a strong jolt from the planned roll-out next year of a common European currency, perhaps the most sweeping move ever in financial integration.

The new currency, the euro, will also enable business in the comparatively small, lower-cost economies to more easily compete with their rivals in bigger European countries.

The euro "will reduce the risk in trade and finance that is part of dealing in different currencies," says Brian Gendreau, an emerging-market analyst at Salomon Smith Barney in New York.

The euro will also trigger mergers, both at home and within Europe. "We will see much more merger and acquisition activity, with the banking sector taking the lead," says Joan Gregory, manager of the Scudder Spain and Portugal Fund, a closed-end mutual fund.

Investors may thank nothing more than dull discipline. The promised boon from the euro has compelled Lisbon, Madrid, and Rome to knuckle under to an new regime of restraint in their budgets. Otherwise, they wouldn't qualify to join the first group of countries to embrace the currency.

Currency as catalyst

All three countries have lived down reputations as big-deficit, big spenders by slashing state spending and quashing inflation.

"The euro has been the catalyst for getting these countries to focus on fiscal discipline," says John Tribolet, a manager for Nicholas Applegate International Core Fund in San Diego.

Interest rates have drifted lower while both investor confidence and stock prices have surged. Indeed, many native investors have discovered their equity markets for the first time, shifting into stocks and out of comparatively low-yielding fixed-income securities, analysts say.

Investors can get a piece of these markets through closed-end mutual funds or through World Equity Benchmark Shares (WEBS). Traded on the American Stock Exchange, WEBS track a variety of single-country indexes.

Or you can buy shares in a traditional mutual fund that focuses on Europe, with the expectation that a good chunk of the assets will be invested in these southern nations.

Even if you're bullish, you don't want to put too much of your portfolio into any single foreign country, financial advisers say. Many suggest that Americans keep 20 or 30 percent of their stock holdings overseas, for diversification.

That Ringing Sound: Profits

Mutual funds offer a diversified way to invest in a country's economy, but investors can also snag shares in specific companies.

US investors generally use American Depository Receipts (ADRs). They represent ownership in a foreign company and trade like stock shares.

Among the best ways to invest in an emerging economy is telecommunications companies. Growth brings demand for more telephones, more ways to use them. Witness the explosive growth of cell phones in Asia.

Portugal Telecom S.A (stock symbol, PT) enjoys one of Europe's most favorable regulatory markets and will retain much of the country's telecom market until 2000, says Joan Gregory, manager of the Scudder Spain and Portugal Fund. Spain's Compania Telefonica Nacional de Espana S.A. (TEF) appeals to analysts because of its growing franchise in Latin America.

For some Italian flavor, Telecom Italia (TI) rang up a 79 percent gain last year. "It's installing modern networks and improving customer service," says John Tribolet, international portfolio manager at Nicholas Applegate in San Diego.

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