To some extent this is borne out in the data. Unemployment seems to be flattening out and the recent Purchasing Managers’ Surveys have indicated economic expansion, whilst the Spanish stock market is one of the best performing of the European bourses this year, up over 27% (at time of writing). With yields too on Spanish government ten-year bonds now down to c.4.28% having peaked at 7.59% last July, the debate for Spain (and perhaps for much of the eurozone), now shifts to the trajectory of the recovery and its sustainability.
Spain is a fascinating case study because of the proactive nature of the reforms that have been pushed upon the financial sector. Much of the system’s bad property loans have been removed from banks’ balance sheets and are now owned by a bad bank*, SAREB. The banks themselves have been recapitalised, with the most thinly capitalised part nationalised via a government vehicle, FROB. Those that remain in the private sector have been aggressively raising capital with their stock prices responding favourably. Banco Popular for example, the fourth largest bank in Spain, has seen its share price rise over 70% from its lows at the end of June this year.
This all said plenty of challenges remain. Retail sales in Spain continue to decline, industrial production growth is limited and most importantly, the housing market could still have further to fall. As measured by the Instituto Nacional de Estadistica, house prices are down 36.7% since 2007. With so much excess inventory on the books of the good banks (still — as some assets didn’t meet the thresholds needed to be transferred to SAREB), the bad banks, and within the private sector (locals and ex-pats), with all aggressively trying to sell, the question is who will buy and at what price? Might the consensus opinion that the Spanish property market has bottomed be too convenient and too optimistic? This is probably the biggest risk to an ongoing recovery in the Spanish economy – the eurozone’s fourth largest.
Source for data: Bloomberg as at 20 October 2013
*Bad bank is a term for a financial institution created to hold non-performing assets owned by a state guaranteed bank.
Matthew Beesley, Portfolio Manager, Head of Global Equities
These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser
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