With the beginning of the year comes the process of scrutinising equities, one of the most common classes of assets. This scrutiny is a fundamental exercise for any analyst, manager, financial intermediary or investor. The analysis of the cycle, expected profits, dividend yields and the interpretation of multiples. In absolute and relative terms, these are some of the instruments we use to try to decipher the intrinsic value of a company or market.
So, while cautious of falling into what in 1991 was named “home bias” by French and Poterba (upon determining that share portfolios of American investors were comprised of 94% American companies despite the fact that the US represented just 48% of the global equities market at that time), if we analyse the Ibex for a moment, we can say that 2018 may be the year for looking out “from behind closed doors”.
- The Ibex is beginning a new season after a relatively poor performance and in spite of market expectations, which paves the way for attractive valuations (12-month forward P/E relative to Eurostoxx 50 below 25 year average).
- With ROEs on a par with European companies, the low yield on the Spanish market compared with the Eurostoxx does not respond to fundamentals. In other words, Spain offers the same level of ROE as the European market (approximately 8%) at a much lower price to book value.
- The correlation between expected 12-month profits and the performance of the Ibex has been practically at an all-time low since the summer (when political uncertainty was more influential). This could cause an anticipated re-rating, which we may see with publication of business earnings in the fourth quarter.
- Despite the good momentum of businesses and generalised deleveraging, profits per share on the Ibex remain below pre-crisis levels, which demonstrates the vast amount of ground still to be made up in terms of the valuations of Spanish companies.
- The negative impact suffered by Spanish companies due to currency movements in 2017, which was an unquestionably strong year for the euro, is not expected to be repeated to such an extent in 2018.
- Expected dividend yield for the current year is only exceeded by the FTSE100 (based on European indices, the S&P500 and the Nikkei225).
Although the negative impact of political uncertainty in the Spanish market was undeniable in 2017 and even though these concerns have not dissipated, the current scenario of recovery for the Spanish economy is obvious and it is gaining traction. This should act to soften the blow in the event of renewed mistrust that may manifest itself as falls in the market:
1) Growth prospects for the coming years are the highest in the Eurozone. Furthermore, growth is now healthier and more balanced, as the construction sector is losing weight and tilting the commercial scales towards tourism and an increasingly thriving domestic demand.
2) The competitiveness of the Spanish economy is demonstrated by the harmonised growth of net exports since 2010. This has been possible thanks to the containment of unit labour costs and the normalisation of availability and credit cost at similar rates to Germany and France (Fitch indicated in October that credit to businesses had stopped falling for the first time in six years).
3) The positive dynamic in employment creation, which still has a long way to go, demonstrates the still considerable potential for growth in internal demand.
4) Catalonia, which represents over 20% of Spanish GDP, drops 4 decimals per quarter since the political uncertainty began. This represents a reduction of the national GDP of 20% of this 1.6% in annual loss. In spite of this not insignificant figure, the negative impact of the tension seems to be under control nationally.
Alongside all of these factors, if we also consider the tailwind from greater confidence in the recovery of the Eurozone - which we are now seeing in yields on bonds and the euro, the macroeconomic policies underpinning growth that are still clearly in place and expansion in step with global economic principles (let’s not forget that 36% of Ibex revenue comes from emerging countries) - the domestic market is satisfying many of the requirements to perform adequately in 2018.
Column by Pilar Arroyo, a manager of funds and multi-asset SICAVs at Banco Alcalá, Crèdit Andorrà Financial Group Research.
Pilar Arroyo is a manager of funds and multi-asset SICAVs at Banco Alcalá, Crèdit Andorrà Financial Group Research.
She joined Banco Alcalá in 2012, having also worked in the company’s fixed income division and the investment advisory department.
With seven years’ experience in the sector, she previously worked as an analyst in the investment department of Deutsche Bank Private Wealth Management.
She holds a Bachelor’s Degree in Business Administration and Management from Comillas Pontifical University (ICADE-ICAI) in Madrid.