Spanish economy in need of a rise in interest rates
The Spanish equity market remains a small player in the European indices and while offering sound de...
The Spanish equity market remains a small player in the European indices and while offering sound defensive positions, holds few options for fund managers looking for a growth story.
As a result of its relative size and the heavy skewing of the IBEX, with 65% in five banking and telecoms stocks, fund managers are prefering to look at the market along pan-European sector lines rather than as a market in its own right.
Fund managers agree recent unimpressive performance by the Spanish equities market, which was down 4.2% year to date on 10 May, will continue with the market trading sideways in a period of consolidation. Chris Rice, fund manager for HSBC's European Growth fund says: "Growth is very strongly driven by low European interest rates. The Spanish domestic economy is growing way above the European average.
"The consensus is that it should grow up to 4% in the next 12 months. The negative that comes with that is inflation is also picking up quite strongly."
Inflationary fears have not been eased by the joint interest rate policy among Euroland countries. Rice says the joint interest rate currently stands at 3.75%, favourable for economies like Germany but it is not high enough to quash inflationary worries in economies like Spain, Portugal and Ireland. Rice says inflation in Spain could go up past 3% to stand at double the European average.
He says: "We have always looked at Spain in terms of a European context. Telefonica, which is about 30% of the IBEX, has much more in common with European telecoms than it does with the banks, which make up a further 35% of the IBEX."
That approach has led to a holding in Telefonica, which Rice believes has a strong growth story because of its holdings in Latin America where telephony still has room for expansion. He expects his holding in Banco Popular to do well in the climate of rising interest rates, and the electricity utility Endesa looks set to be involved in a wave of mergers across Europe.
Andrew Spencer, head of European pooled funds at Fleming Asset Management, says that it is within defensive sectors like utilities and oils that Spain looks attractive, for Europe-wide sectoral reasons.
Spencer says Flemings maintains a broadly country neutral position in its European funds but is currently 0.9% overweight in Spanish equities.
In the oil sector Spencer likes Repsol, which is benefiting from a global upturn in oil prices, as well as cost savings brought by improvements in refining technology. In utilities he owns the electrical provider Union Fenosa, which has a strong earnings stream. He says the steel company Acerinox looks cheap and is experiencing powerful earnings trends. In the banking sector he owns BBVA, which has the most clearly defined e-commerce strategy of the Spanish banks.
Spencer believes the Spanish market has a long way to develop, with many large companies remaining in family hands, but there are growing savings demands, which he expects to drive the market on.
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