The Strategist

Why investing in Spain is worth the candle

09/07/2017 - 15:07

One of the problems of investors in European assets is associated with an abundance of factors that need to be considered. Spain differs from Italy, and Italy differs from Germany. But when the trend develops in the right direction, it creates a lot of opportunities.

Now shares of Spanish companies offer a great way to play the card of the eurozone’s recovery. The country was badly hit by the crisis in Europe, bubbles in the banking industry and the real estate market. Gross domestic product fell by almost 10% from the pre-crisis peak, unemployment jumped to 25%.

Since then, the situation has improved noticeably. According to forecasts, the economy of Spain will add 3% this year. There is a current account surplus (although its deficit was about 10% of GDP before the crisis). There has been a significant reduction in the financial leverage - since 2010, lending to the non-financial sector has declined by 50% of GDP.

And this is not all. Recently, Spain's GDP returned to pre-crisis levels. Unemployment, although falling, still remains quite high. Its level of 17.1% indicates that the market has enough free labor that can be used.

The Spanish stock market allows us to play not only on domestic growth, but also on global European trends. Particularly promising are stocks of banks that occupy a significant share in the composition of the indices IBEX 35 and MSCI Spain. 

The European Central Bank’s gradual withdrawal from its over-adaptive monetary policy should support banks as interest rates increase. The largest credit organizations of the country - Banco Santander and BBVA - will win the most from this process.

In addition, the dynamics of Spanish companies may be favorably affected by economic recovery in other regions, especially in Latin America, although there are certain political and trade risks. Spanish stocks cannot be called cheap - the forward coefficient P/E of the IBEX 35 index is 13.9, according to the Wall Street Journal referring to FactSet. The same indicator for the European index Euro Stoxx is equal to 14.8.

However, they look very attractive compared to bonds, since the yield of both government and corporate debt instruments is extremely low. The rally in the bond market is still going on, but the potential for stock growth is much higher.

There is a certain political risk associated with Spain: the question of Catalonia's independence is being discussed again. The next referendum on it will be held on October 1. However, investors are much more worried about the devastating political battles in Italy. In comparison with it, Spain looks like a quiet harbor.

Recently, markets began to pay close attention to the country: Spanish stocks are in high demand, rather than French and German. In addition, they have better survived the growth of the euro this year. Spanish indices are still declining, but if the recovery of the euro-zone economy continues, this process will not last long.