Spanish Stocks Merit Upgrade to Market-Neutrality Owing to Improving Economic Trends

Spain’s Bolsa de Madrid, as measured by the IBEX 35 index, may have rallied a relatively modest nine percent denominated in euros, or just 0.8 percent in US dollar terms compared with many other Western European markets since the outset of the year.  Yet, Spanish shares have aggregately soared 110 percent (or 95 percent denominated in US dollars) from thirty-one months ago, when it plunged to its Great Recession low.  To put the extraordinary recovery of Spanish equities into historical perspective, IBEX 35 lost a staggering 63 percent of its value from 8 November 2007 to 24 July 2012, but has regained so much ground since then that it now stands at 71 percent of its 2007 peak.

Highlighting the recovery in the performance of Spanish stocks compositely is the fact that the IBEX 35 reached its nadir on precisely the same date (24 July 2012) when ten-year Spanish government bond yields climaxed at 7.6 percent.  Although domestic politics could play havoc with the shares market in the run-up to elections later this year, economic projections favor an upgrade of Spanish shares to market-neutrality.

Politics domestically may generate downside volatility occasionally ahead of upcoming national balloting.  Still, Global Markets Intelligence (GMI) is confident that, even if the incumbent Popular party (under the leadership of Mariano Rajoy) is defeated in the nationwide vote, neither the anti-establishment Podemos nor centrist Ciudadanos party – two recently formed alternatives – will amass sufficient votes to claim victory in the forthcoming election, the likely outcome of which would be a governing coalition of two or more parties.

With the conservative Popular party under a darkening cloud stemming from a widening probe of corruption allegations, the center-left PSOE would likely prevail, but without a majority, in which case – if it could find common ground – it would probably form a ruling alliance with Podemos, thus retaining key ministries (meaning Economy, Budget and Trade as well as European and Foreign Affairs) in the hands of seasoned, though moderate, appointees of the PSOE.  So, regardless of which party is victorious in the coming general elections, we do not anticipate much change in the focus of budgetary policy.

Politics and policymaking aside, the outlook for Spain’s macro-economy appears brighter than any of its rivals in either the outer core or periphery of the European Monetary Union (MEU).  After having exhibited surprising resilience in the face of the 2007 – 2009 economic and financial calamity, business activity in Spain is likely to gain further momentum this year and next notwithstanding further modest contraction in government spending.

Record-low borrowing costs and intensifying private-sector demand will proceed to induce businesses to expand capital spending in addition to augmenting their payrolls in view of the abundance of low-cost labor with unemployment hovering around the 24 percent level.  Higher employment should elevate real personal disposable income and reinforce the revival by engendering increased consumption by households.  Further, as the euro stabilizes at its lowest point in almost twelve years, the competitiveness of Spanish exports will continue to improve as evident in the steady upturn of the nation’s terms of trade – enhancing the country’s economic prospects over the next twenty-two months.

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