Why are we overweight Spanish equities?
1. Valuation: Spanish equities look unusually cheap on 12m forward P/E relatives as well as on normalised earnings.
2. Price momentum: Spanish equities are oversold relative to Continental European equities.
3. Brazil exposure: Spanish Brazilian exposure has significantly underperformed the EURBRL exchange rate; 20% of Spanish sales come from LatAm with a majority of these coming from Brazil.
4. Banks: Spain is a play on European banks and we are overweight European banks (especially retail banks). We like Spanish banks in particular for the following reasons:
i) Spain has a fast recovering economy;
ii) Spanish banks are mainly retail banks (for 6 years we have been overweight retail banks relative to other banks);
iii) Spain is the only country apart from Ireland where the front book is above back book for mortgage NIMs;
iv) Spanish banks are unusually sensitive to rising rates; and
v) Spanish banks are not expensive relative to their peers.
5. Growth: Spanish PMIs are consistent with c3-3.5% GDP, driven by employment growth which is near an 8-year high. GDP is only 2.5% above its previous peak compared to 11% and 15% in Germany and the US, respectively.
6. Housing: Spanish housing and construction activity is recovering strongly.
7. FX: Spain tends to outperform if the euro strengthens (we are long term euro bulls). 8. The political risk is overstated, we think: In our opinion, the crisis is unlikely to escalate further and will result in a compromise (e.g. more autonomy for Catalonia, which will remain a part of Spain). Furthermore, we believe markets almost always overreact to political events.
How to play it?
* The following stocks are Outperformed rated by CS analysts: Bankia, Cellnex, Applus, Merlin, Neinor, IAG. Of these, Bankia is cheap on HOLT® and has positive earnings revisions.
* The following stocks have underperformed their European peers and the Spanish market since the flare up of the Catalonian crisis, have positive earnings momentum and are not Underperform rated by CS analysts: Aena, BBVA, Bankia and Caixabank