These days it seems as though the mere mention of Spain immediately sparks debates about high debt and troubled banks. What is rarely discussed is how Spain – more specifically, the Spanish stock index, the IBEX 35 (AKA ESP35) – could actually be an opportunity. We already have the Chinese Dragon, the Indian Elephant and the German Engine – all nicknames that represent investors’ enthusiasm with regard to the respective country’s stock index. Now, with Spain’s stock index so cheap compared to its European peers is it time to keep an eye on the Spanish Bull? Is the IBEX 35 about to become a hot investment? In this article, we will explore what it is that’s making investors so excited about Spain.
The Raging Bull
The reasons why equities in Spain were hammered so fiercely, and why investors were fleeing the country like a stampede, were justified. The country’s banking sector was collapsing, the bubble of the real estate sector was bursting, and unemployment hit a scary 26.94%, meaning that over a quarter of the workforce was unemployed. With more than half a trillion euros of debt courtesy of its banking sector, Spain was viewed as the next Greece, only much bigger. In fact, many postulated that if Greece exits the Eurozone, Spain could follow. Yet rather than sink lower and deteriorate further, Spain charged forward like a raging bull.
By the end of 2013, Spain was able to exit its bailout of €100bn without asking for emergency credit lines from the ECB. And even though unemployment is still high, it has recently plunged from 26.94% to 23.7%.
But that’s not all. It seems the falling euro has revived Spain’s export industry, and the country has been able to quickly recover, faster than not only Greece but even France and Italy. In fact, the latest growth figures for the Eurozone revealed a staggering picture: Spain and Germany were growing at the same pace – 0.7% – in Q4 of 2014, which makes Spain the fastest-growing economy in the Eurozone, alongside Germany. This raises hopes that Spain’s growth may even accelerate further in the next quarter, and become one of the strongest growth contributors for the Eurozone.
As one can imagine, a sudden acceleration in Spain’s growth, combined with a low IBEX, could mean a big catch-up game for Spanish stocks, which might prove very rewarding for early investors.
IBEX Catching Up With the DAX
Although the latest turnaround in Spain is a major factor in the recovery of Spanish stocks, it’s not the only one. Firstly, the largest stake in the IBEX still belongs to big banks, such as the Spanish giant Santander. As the ECB embarks on a massive stimulus of €60bn euros a month in order to stimulate credit, Spanish banking giants expect to benefit greatly. Not only that, but as the euro continues to be weak, Spanish exports become cheaper, and with most of Spain’s growth oriented towards exports, it means that industries trading under the IBEX are expected to recover as well.
Yet as one might guess, buying stock and stock indices is not just about what you stand to gain – it’s also a matter of pricing. As you can see in the return chart above, while the DAX rallied more than 90% over the past five years, the IBEX 35 gained 0.2% in the same period. In other words, if things continue to go well for Spain, the Spanish Bull will begin to catch up with the German Engine, and the IBEX 35 is expected to charge higher.
Of course, nothing is certain and things could go wrong, but if things go right for Spain, then after the Chinese Dragon, the Indian Elephant and the Asian Tiger, we might see the Spanish Bull, ready to charge forward and catch up with its German peer, the DAX.