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Spanish Stocks Miss Rally on Rajoy Budget Gap Skepticism

March 15, 2012

Spanish Prime Minister Mariano Rajoy. Photographer: Alessia Pierdomenico/Bloomberg

Spanish Prime Minister Mariano Rajoy. Photographer: Alessia Pierdomenico/Bloomberg

Spanish stocks are the only developed market suffering losses this year as Prime Minister Mariano Rajoy fails to rein in the budget deficit fast enough to assure investors.

The IBEX 35 Index (IBEX) dropped 2.1 percent in 2012 through yesterday, the only decline among 24 developed markets tracked by Bloomberg. That compares with an 11 percent rally in the Stoxx Europe 600 Index (SXXP), the best start to a year since 1998. The Spanish gauge has erased all gains that followed the European Central Bank’s Dec. 8 announcement of unlimited three-year loans for banks at below-market borrowing costs.

Investors are shunning Spain after Rajoy said the budget deficit will be higher than forecast while Germany praised Italian Prime Minister Mario Monti’s “bold” austerity measures. Spanish benchmark borrowing costs rose above Italy’s for the first time in almost eight months in March, while analysts have cut profit estimates for Spain this year at the fastest pace among Europe’s 10 largest markets.

“Since you got Monti in Italy, the market has said, ‘Fine, Italy is in safe pair of hands,’” said Jacob de Tusch-Lec, a fund manager who helps oversee $18 billion at Artemis Investment Management in London. “It is tough to see in Spain for now what can resolve the crisis. Things are so bad that as an investor you ask yourself, ‘Do I need to be there?’”

Deficit Target

Rajoy increased the target for this year’s deficit to 5.8 percent of gross domestic product from 4.4 percent following a summit of European leaders on March 2, three months after taking office. The IBEX 35 has dropped 2 percent since the move that Rajoy called a “sovereign decision” for Spain alone. The index rose 0.4 percent to 8,426.7 at the close in Madrid today.

Spanish lenders are saddled with 175 billion euros ($228 billion) of troubled real-estate assets after a property bubble burst and the economy contracted. They had the second-highest capital shortfall in the European Banking Authority’s stress tests in December, after Greece. The association reported that Spanish lenders needed to raise 26.2 billion euros as of the third quarter of 2011, compared with 15.4 billion euros for Italian firms.

Spain’s jobless rate is 23 percent, more than double the euro-region average, while economist projections compiled by Bloomberg show GDP may shrink 1 percent this year, its third contraction in four years. That compares with forecasts for a 0.4 percent contraction in the euro area as a whole, Bloomberg data show. Home prices fell the most on record in the fourth quarter, the government said today.

Merkel Praise

While Italy has announced a 20 billion-euro austerity plan to balance the budget by 2013, Spain’s 15 billion euros in cuts are already falling short. Monti has overhauled the Italian pension system, raised taxes and wants to change labor laws, winning praise this week from German Chancellor Angela Merkel for his “bold” efforts.

In Portugal, western Europe’s poorest economy, Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro bailout plan that allowed the country to avoid default. He said March 5 he will not follow Spain in easing deficit targets. Rajoy is due to present spending plans and additional austerity measures on March 30.

The IBEX 35 has fallen to the lowest level since June compared with Italy’s FTSE MIB Index, according to data compiled by Bloomberg.

Relative Play

“We tend to look at Spain as a relative play with Italy,” said Patrick Moonen, who helps oversee $420 billion at ING Investment Management in The Hague. “We expect Spanish weakness to continue as the deficit figures are out of line with estimates.”

The EU forecast in November that Spain would have the third-highest deficit in the 17-nation euro area this year, at 5.9 percent, trailing only Ireland and Greece. European leaders called on Spain to prune an additional 0.5 percent of GDP from the 2012 budget at a March 12 meeting after the Iberian nation ended last year with a budget gap twice that of Italy.

Spain’s 10-year bond yields closed higher than similar- maturity Italian securities on March 5 for the first time since Aug. 19. Italian debt had yielded 80 basis points more than Spanish bonds on Dec. 8.

Further Proposals

Spanish stocks may catch up with other markets if the government unveils further money-saving proposals over coming months, according to Juan Barriobero, investment manager at DWS Investment. His company, which oversees $171 billion worldwide, is underweight Spain, meaning it holds less of the nation’s shares than represented in global benchmarks, he said.

“Once the reforms are seen through, maybe after the summer, there is a long way to go for Spanish equities,” Madrid-based Barriobero said in a phone interview on March 9. “The Spanish market has an important re-rating potential.”

Forecast 2012 earnings for the Spanish gauge have dropped 9.9 percent this year to 832 euros a share, data compiled by Bloomberg show. The cuts have pushed the IBEX 35’s valuation to 10 times projected earnings from 9 at the start of the year.

Spain is “struggling in a low-growth economy and not able to come out of that,” said Mouhammed Choukeir, who helps oversee $8.1 billion as chief investment officer at Kleinwort Benson in London. “We are trying to establish value but also the potential to grow earnings. And given the weak economic backdrop in Spain, that potential is somewhat limited.” He said his team is underweight Spain, and some funds don’t own any Spanish stocks at all.

Biggest Drag

The biggest drag on the IBEX 35 this year is Telefonica SA (TEF), Europe’s second-largest phone operator by market value. The shares have dropped 5.7 percent. The company on Feb. 27 predicted its profit margin will continue to decline this year after 2011 earnings slumped. Telefonica cut its dividend in December for the first time in a decade.

Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), the largest banks in the country, have risen on average 1.5 percent even as the Euro Stoxx Banks Index (SX7E) jumped 17 percent. Spanish banks reduced lending at a record pace in December and defaults mounted as the country’s recession and rising unemployment took a toll on their ability to make loans to solvent borrowers.

The Spanish market is hindered by “idiosyncratic” risks and a lack of economic competitiveness, according to Mark Glazener, who helps oversee $197 billion as leader of the equities team at Robeco NV in Rotterdam. Robeco sold its last Spanish holding, Bilbao-based BBVA, in 2011, he said.

“We are not exposed there, and the main reason is we don’t find any interesting-enough stocks to include in our portfolios,” he said. “There is still some pain to come before the value gets that attractive.”

To contact the reporter on this story: Alexis Xydias in London at

To contact the editor responsible for this story: Andrew Rummer at

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