The European periphery is back from the brink. Where should you invest?

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Ireland, Spain, Portugal and Greece have come a long way since the 2008 financial crisis. They are now often cited as examples of where painful reforms led to economic growth.

Given their turnaround, CNBC asked economists and market strategists which of these countries is the best option for investments.

Spain – the safe-bet

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The Iberian economy has emerged as the "safe-bet" option among market observers for investment opportunities.

Spain grew at a pace of 3.2 percent last year and is expected to expand 2.8 percent this year. Its gross domestic product (GDP) growth rates are back to pre-crisis levels thanks to a pickup in exports and higher private consumption, which is still below pre-global financial crisis levels.

Ken Wattret, chief Europe economist at TS Lombard, told CNBC that the Spanish recovery has been remarkable thanks to labour market reforms, an early rescue of the banking sector and success in finding new markets for exports.

Export levels since 2008
TS Lombard

Since 2016, Spain's exports have been higher than those of Germany, France and Italy.

However, its attractiveness might be fading.

Ian Harnett, chief investment strategist at Absolute Strategy, told CNBC: "Spain has performed well this year reflecting an improving underlying economic environment – but has given some of this back as investors sought to lock in some profit as the Korean situation developed."

"The fact that this is the most liquid market of the four identified (Ireland, Greece, Spain and Portugal) is probably equally as important as any macro factors," he said.

Brexit casts a cloud of uncertainty over Ireland

If Brexit weren't to happen I'd chose Ireland. Assuming Brexit happens, I choose Spain.
Dan Collins
CEO of CCO Global

Among the countries to receive a bailout during the financial crisis, Ireland wins when looking at the macro-performance. According to Goodbody, a broker and wealth management firm, Ireland's economy has ended the "lost decade".

"Ireland remains on track for a fourth year in succession of rapid growth…Some of the policy risks identified at the beginning of the year, US corporate tax reform and European politics, have abated, while better economic momentum in the international economy has provided a tailwind," the firm said in a report on August 8th.

Ireland has proven itself remarkably stable: CEO

Remarkably, after registering some of the highest unemployment rates, Ireland is set to see full employment by the end of next year.

"But there are questions going forward," Wattret from TS Lombard said, citing Brexit and whether Ireland will be able to keep the current pace of growth.

Goodbody highlighted capacity constraints in the housing sector and infrastructure as the top challenges.

"If Brexit weren't to happen I'd chose Ireland. Assuming Brexit happens, I choose Spain," Dan Collins, CEO of CCO Global told CNBC.

One of the big Brexit question marks is the border between Ireland and Northern Ireland, which is crossed by about 30,000 people every day without customs or any immigration checks.

Don't exclude Greece

A view of the acropolis in Athens
Marios Polyzogopoulos | CNBC

"If one's looking for a more risky option, Greece is the answer. In comparison with other periphery countries where most of the good news has been priced in, Greek valuations might offer the best returns," Wattret from TS Lombard said.

Greece has slowly been implementing all the demands from European creditors since 2015. Credit ratings agencies have recently revised upwards their positions on Greece after the country received another disbursement from the EU and they recognized improved fiscal prospects and tentative signs of the economy stabilizing as the basis for the upgrade.

Greece's public debt is set to reach 178.8% of GDP this year and 174,6% of GDP in 2018.
Data from the European Commission

The International Monetary Fund has also agreed in July to contribute 1.6 billion euros ($1.8 billion) to Greece as part of the current bailout once Europe provides some debt restructuring, due to be announced next year.

At the same time, the government has to privatize some companies as part of the ongoing bailout program, including the electricity market.

"Greece, has had a very good run over the last 12 months as the Eurozone has come back into favor and peripheral bond yields fallen. It is actually one of the few Eurozone markets that have a positive correlation with the Euro," Harnett from Absolute Strategy said.

"It has also seen the economy gain from a major labour cost adjustment in the last decade. However, debt issues remain and any weakness in economic growth will weigh heavily on the economy and markets," he added.

Greece's public debt is set to reach 178.8 percent of GDP this year and 174.6 percent in 2018, according to figures from the European Commission.

The upside potential may be in Portugal

The Portuguese market has more attractive valuations of the four.
Ian Harnett
Chief investment strategist at Absolute Strategy

Portugal has surprised many analysts with its economic growth trajectory since asking for a financial bailout in 2011.

The IMF forecasts a 2.5 percent growth rate for this year and an unemployment rate below 10 percent. "Portugal's near-term outlook has strengthened considerably, supported by a pick-up in investment and continued growth in exports," the International Monetary Fund said last June.

According to Harnett, "the fact that Portugal especially is off the radar screen at the moment may suggest some upside potential."

"Overall therefore, the Portuguese market has more attractive valuations of the four and is the least negatively impacted by all the other factors. The high correlation to the Euro for Ireland and Spain make us nervous of these markets while we expect to see the euro strengthen in the coming year or two," he said.

Lisbon, Portugal
SeanPavonePhoto | Getty Images

However, Portugal still has low competitiveness levels and high public and private debt, which raise some questions over its future, in particular when taking into account the expected increase in interest rates by the European Central Bank.

Joao Almeida, economist at Morgan Stanley, added in a note on August 14 that "the stock of non-performing exposures remains relatively high. This is probably a legacy issue that will take quite a while to improve to a great extent."

Be careful about Italy

Italy didn't receive any sort of financial rescue during the crisis but it cannot be forgotten when talking about the European periphery.

Political risk in Europe has not disappeared yet, Italy remains: Pro

It's the third largest euro economy and perhaps the biggest headache to its stability.

Italy is growing below the euro average and its high levels of debt are a concern for analysts. Erik Jones, professor of International Political Economy at Johns Hopkins University, told CNBC earlier this month: "There's a giant amount of non-performing loans (NPLs)" in Italy.

"The economic recovery is taking place but at a really slow pace … (And) there are political risks in the horizon with the upcoming general election," he added.

High levels of bad loans constrain banks' ability to lend and can divert funds away from more productive parts of the economy. This can be a particular problem for an indebted country like Italy.

Higher interest rates will mean higher rates for borrowers across the spectrum in Italy, increasing the chances of any defaults on car loans, bank loans, mortgages, and so on.

Change in real GDP
TS Lombard

Data collected from TS Lombard showed that among all the periphery countries, Italy is the only one where the change in real GDP per capita has turned negative after 1999.

"The recovery is expected to continue, but risks ahead are significant," the IMF said at the end of July. The Fund revised upwards its forecasts for Italian growth this year, but warned that the "downside risks are significant."