Foros de la Plataforma por una Vivienda Digna

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Why Spanish eyes are unlikely to be smiling



SPAIN’S economic performance has been outstanding since it joined the EU in 1986. Its economy has experienced just one recession in the past 20 years, and GDP growth has averaged more than 3% a year, compared with 2% in Germany and France. The Spanish unemployment rate has fallen from more than 21% to just 9%, and GDP per head is now 92% of the euro zone average, compared with only about two-thirds in 1986.

Spain has benefited from negative real interest rates, which have fuelled a housing-market boom and huge growth in construction spending. Moreover, benign real interest rates have encouraged firms to leverage up their balance sheets significantly. That, together with buoyant top-line growth, has contributed to a sharp increase in the profits growth of the Spanish corporate sector.

With European rates expected to rise towards 4% next year, we expect Spain’s economy to slow sharply. Because of the adoption of the euro and the ceding of monetary policy to the European Central Bank (ECB), Spanish authorities no longer have their traditional tools for stimulating a slowing economy: currency devaluation and interest-rate cuts. So, for the first time in many years, Spain could grow by less than its European peers. Against this backdrop, we suspect that the Spanish IBEX 35 is likely to underperform its European peers over coming years.

Since the beginning of 2001, MSCI Spain has risen by more than 20%, compared to a decline of 11% for MSCI Europe ex UK. Meanwhile, Spain’s IBEX 35 has increased in value by almost one-third, while the German Dax 30 and French CAC 40 have fallen by 13% and 16% respectively.

Spanish equities do not look cheap. On a price-to-earnings relative basis, they are well above their long-term average. Over the past decade, the Spanish market has traded at an average discount of 12% to the German market, compared with a 3% premium at present. Some of this is probably justified because of greater balance-sheet leverage and higher profits growth. With the rest of Europe likely to catch up on both fronts, the valuation gap should reverse. On a sector-adjusted basis, the Spanish market looks even less appealing (on 14.5 times) compared with its European peers (on 12.7 times).

With corporate debt levels well above the euro zone average, the scope for a further re-leveraging of Spanish equities is limited. On the back of very low real interest rates, Spanish companies have significantly increased debt, which has helped their profits growth and given a solid boost to share prices. This is in direct contrast to the rest of the euro zone where corporates have deleveraged sharply and paid back debt over recent years. At the same time, the large amount of debt on balance sheets raises the risk that Spanish corporates may have to scale back their capital expenditure and hiring plans amid rising interest costs and slowing profits growth.

In summary, we expect the Spanish equity market to underperform other euro zone markets over the coming years, as significantly higher interest rates put pay to the housing-market-led economic boom. With debt levels near record highs and top-line growth set to slow, we see little prospect for profits growth to increase. Meanwhile, Spanish firms are more likely to be acquirers than takeover targets, suggesting that Spanish equity prices will benefit less from the global M&A boom than their European counterparts.

Simon Rubinsohn is a strategist at Barclays Wealth

NOTE: The authors on these pages have been selected for their expertise in various areas of investment. They or the funds they manage may or may not hold positions in the stocks discussed.

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