Uninspired by the Ibex as Iberia Idles

Intermediate
  • Spain is in recession
  • Too many people chasing too few jobs
  • Business and consumer sentiment evaporated
  • Lockdown may be lifting, however, tourism will be a pale shadow of past years
  • Trade the DAX/IBEX 35

Global Equities Improve

Since a low point on March 20 at 99.58, a fall of 30.40% from the start of the decline, the Spotlight Indices World Equity Index (SPIWEI) has bounced back by 20.28% to 119.77 as at the close on Friday, May 29.

Global equities 12 month

Figure 1: Spotlight Indices World Equity Index (SPIWEI), 12-Months                                                                         Source: Spotlight Indices

I have not taken the decline from the earlier peak on January 17, as at that stage many nations, in the west at least, had not entered a lockdown. This latest move higher places this index just shy of 50% of the range since March 20 (121.33) and there is every reason to expect that this level will be broken with the 61.8% level of 126.46 being in sight.

Europe Lags

However, as Figure 2 shows, the western European markets have not performed as well as the U.S. or Asia. Indeed, they occupy just three slots in the top 10 and five of the bottom10.

Equity returns year to date

Figure 2: Major Stock Exchanges, YTD % Change To May 29, 2020                                                                         Source: www.investing.com, Spotlight Group

One might feel that given the amount of liquidity and extraordinary accommodation the central banks have sought to provide when combined with government/ regional initiatives it may be an interesting opportunity to look at the undervalued exchanges.

No Outperforming Bull In Spain

I am not so inclined when it comes to one, i.e. Spain and the IBEX 35. Look at the economics, it is not for the feint hearted.

Preliminary data from the Spanish National Institute of Statistics (INE), indicated that CPI fell to -1% YoY in May (-0.7% in April). This decline reflects falls in fuel and oil prices, although food prices continue to rise. May inflation in Spain has not seen a decline to -1% since 2016.

These preliminary readings for May confirm that the Spanish economy has entered deflation during the COVID-19 crisis, a prospect that could easily extend across all the Eurozone.

Spain’s unemployment rate increased to 14.41% in Q1of 2020. That was the highest rate since the first quarter of 2019 as the Covid-19 crisis escalated. Randstad, the leading human resources firm in Spain revealed that over 2.5 million workers in the Eurozone’s fourth largest economy are actively looking for

another job. This is equal to 13% of the total workforce. Youth unemployment remains at 33.10% at a time when job vacancies have decreased to just 14.47 thousand, matching the lowest figure since 2004, i.e. the equal worst reading since 1950.

Spain’s industrial confidence indicator edged up to -33 in May of 2020 from an 11-year low of -35.1 in April as output expectations improved -30.8 vs -52.8 in April. However, as INE also reported on Spanish retail sales for April, which registered a record annual drop of 31.6% so there was an increase in the stock of finished products 11.3 vs 4.2 and new orders expectations declined further -56.9 vs -48.2.

The greatest drop in sales was seen in small establishments with a fall of 51.1%. In contrast, the large chains suffered less as they were supported by their food stores, although they also showed significant deterioration of -6.5%.

This comes at a time when the consumer confidence indicator in Spain tumbled 13.4 points from a month earlier to 49.9 in April 2020, the lowest level since December 2012, as the coronavirus crisis deepened. The gauge for current situation plunged to 31.5 from 57.2 in March, while the expectations sub-index was down to 68.3 from 69.4.

Should One Look For Interest In The IBEX 35?

It can often be argued that one should be seeking value in the indices, sectors or companies that are lagging the rest of the market. If one were to follow that position, the IBEX 35 would look good as an investment opportunity cf. the DAX, CAC 40 or FTSE MIB. S, why am I ruling this out?

European equities

Figure 3: Major Eurozone Stock Indices, Base = 100 December 31. 2011                                                                         Source: www.investing.com, Spotlight Group

Figure 3 illustrates just how far the IBEX 35 has fallen during the crises and is virtually flat lining. Why, even Italy’s FTSE MIB has shown more signs of life.

The IBEX 35 only shows a buy signal at the 5-hour and weekly level, before and after it is marked out as a “Strong Sell”.

Of course, one may say that as quarantine-free tourism would resume next month that should help the economy, however, the recovery will not be smooth and so far, the only way Spain is getting a benefit from ECB. EU action is via lower bond yields which have fallen to their lowest levels since March.

I would be inclined to make any European equity investment in Germany or France as when tourists return to Spain, revenues will be lower than in the past as social distancing on the beaches and in restaurants implies the cash flow will be light.

So, on a relative value basis, give me the industrial power of Germany over the lure of the beach. Set up a play on DAX/IBEX 35 at 1.6534 and target a 50% extension of the ratio’s range this year to 1.798 times, bet on Germany over Spain.

Dax over Ibex

Figure43: DAX/IBEX 35 Year To Date                                                                                                                        Source: www.investing.com, Spotlight Group

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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