Foros de la Plataforma por una Vivienda Digna

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Spanish consumers and businesses are among Europe's biggest borrowers, and the country's stock market has been one of the Continent's star performers. Guillermo Escribano says there's a link between those two statistics, and it bodes ill for Spanish shares.

Higher borrowing costs will restrain spending, causing the benchmark IBEX 35 Index to lag behind other benchmarks in the region next year, said Escribano, who helps manage the equivalent of $202 million at Metagestion SGIIC SA in Madrid.

``We think 2006 will be the last year that the IBEX outperforms,'' said Escribano, ``As interest rate rises begin to be felt in 2007, there will be an impact on Spanish consumer spending and companies reliant on it.'' He's been reducing his holdings in stocks such as Grupo Ferrovial SA, the country's No. 2 builder, and Inditex SA, Europe's largest clothing retailer.

The IBEX has gained 10 percent this year, making it the fourth-best performer out of 18 Western European national benchmarks tracked by Bloomberg News. It's beaten the Dow Jones Euro Stoxx 50 Index, a benchmark for the dozen nations sharing the euro, for four of the past five years and is leading the measure by 6.8 percentage points in 2006.

Companies such as Inditex and Sacyr Vallehermoso SA, Spain's fifth-biggest builder by sales, have benefited from rocketing consumer spending and a housing boom fueled by record low borrowing costs and rising employment.

Rising Rates

The European Central Bank has lifted its benchmark refinancing rate by a quarter percentage point three times since December, to 2.75 percent, after leaving it at a six-decade low for more than two years. Futures traders have increased their bets that the bank will raise the key rate to at least 3 percent this year to contain inflation.

Consumer spending, the principal motor of the Spanish economy representing 57 percent of gross domestic product, has risen two-fold since 1994. That's given Spain the second-highest ratio of household debt to available income in Europe after the U.K., according to a report this month by Caixa Catalunya, Spain's biggest savings bank.

According to a survey commissioned by newspaper Cinco Dias from polling company Metroscopia, 39 percent of business executives said ``real damage'' will begin if interest rates reach 4 percent; 20 percent said that will come if rates reach 3 percent. The survey of more than 400 executives at companies with more than 10 employees was conducted July 13-19 and the results are 95.5 percent reliable, Cinco Dias said.

Spanish companies have mirrored the enthusiasm of the nation's shoppers, spending $252 billion on mergers and acquisitions over the past two years, according to data compiled by Bloomberg.

Debt Loads

As a result, companies in Spain's benchmark index on average have debt equal to more than three times shareholder equity, according to Bloomberg data. That's the highest among 14 European countries analyzed.

Rolf Elgeti, head of European equity strategy at ABN Amro in London and top-ranked for pan-European strategy in Thomson Extel's 2004 and 2005 surveys, says such high levels of debt will harm the IBEX's possibilities of receiving a future boost from mergers and acquisitions.

``Spanish companies with heavy debt are unattractive takeover targets so it makes a lot of sense for them to buy companies elsewhere that have very little,'' Elgeti said. ``When an already highly leveraged Spanish company offers to purchase another for cash or debt it's bad for the predator's stock and shareholders.''

Good for Banks

Not everyone agrees with the theory the Spanish market has had its day. Rising interest rates will do more good than harm, given that banks, which represent 37 percent of the IBEX, will earn a higher return on lending, according to Sara Perez-Frutos, a director at Eaton Vance Management Inc. in Madrid.

The share prices of Santander Central Hispano SA and Banco Bilbao Vizcaya Argentaria SA, the nation's biggest lenders, have gained 72 percent and 98 percent respectively since June 2003, when the ECB lowered rates to 2 percent and left them untouched until December last year. The increase trails the 233 percent and 281 percent surges in the stock prices of builders Sacyr and Metrovacesa SA.

``Rising rates are in no way going to derail the Spanish stock market or its economy,'' Perez-Frutos said. ``You are talking about a country that was used to rates at 12 percent before entering the EU. Even if the ECB gets aggressive and goes to 4 percent, the economy, its consumers, companies and investors have progressed and diversified far enough to absorb that without any impact.''

Looking for Value

Still, companies in Spain aren't as cheap as those in other European countries. Stocks in the IBEX 35 sell for 13.3 times this year's estimated earnings, compared with 12 for the Euro Stoxx 50.

Excluding financial, oil, telephone and basic resources stocks, which trade at lower multiples than the benchmark's average, the ratio for the IBEX is even higher, at around 16, said Javier Mata, head of analysis at Nmas1 in Madrid. The Spanish market is overvalued and there are better investment opportunities elsewhere, he said.

``Spanish markets will lag the rest of Europe going forward and we recommend reducing exposure there,'' Mata said at a presentation in Madrid on July 4.

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