Communication

Investment Week - The best equities to play Spain's recovery

Spain is still a risk-on play, but its restructured banking sector provide a good way to play the recovery, explains Antonio Hormigos.

Playing the bear case

As a manager of a pure Spanish equity fund, I could be expected to have had a structurally bullish view on the Spanish market. Nothing could be further from the truth. My fund has been playing the bear case and has been very defensively positioned for many years.

Since the summer of 2007, which marked the early stages of the financial crisis, we expected that Spain would have been much harder hit. Its real estate bubble burst and produced a deep recession.

Adjustment

The adjustment process has been long and is still incomplete, but significant progress has been made.

As markets anticipate economic developments, we shifted to a more constructive view 18 months ago. The ECB’s strong commitment, together with some signs of economic stabilisation in the first half of 2013, were what we needed to start shifting our portfolio from a very defensive position towards companies that were more exposed to a domestic recovery.

Data forecasts are still conservative, and future releases will keep surprising on the upside.

Financial conditions are also improving dramatically; interest rates are at historical lows in absolute terms and spreads are still decreasing.

Spanish banks

Banks are one of the more visible positions in our strategy. Bankinter and Bankia are pure domestic plays. Bankinter has the highest quality management in the entire domestic banking sector, while Bankia is a restructuring story that will be seen as a token for the whole of the banking reform. All banks will benefit from cheaper deposits and an eventual return to credit growth within the next three years. However we are still aware that banks remain in a risk zone. Stress tests could reveal the need for more capital.

Airlines and autoparts

The rest of the portfolio is populated by companies with leverage to both domestic and global economic growth. AIG, the owner of Iberia and Vueling airways operators, falls into this group, as is CIE Automotive, a leading autoparts manufacturer.

We like companies with a global business but with a domestic cost base, as labour costs have come down, helping Spanish companies to regain competitiveness. Exporters have been the main leaders in returning to growth.

Rotation risk

We are aware of the risks, of course. In recent weeks we have seen an international rotation from growth to value, which has partially changed the landscape in many markets. This rotation has not benefited Spain.

Valuations are not attractive considering past earnings. If investors are not willing to be patient, prices could fall temporarily.

There is also the risk of economic slowdown, not only in Spain, but across Europe. If extremely low interest rates were the forecast of a future economic slowdown, instead of foreshadowing a recovery scenario, Spain would suffer more than core European markets. Spain is still a risk-on play.