The Contrarian Case for Investing in Spain
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Buy when there is blood in the street.”
- Baron Rothschild
No place seems bloodier and more worrisome than Spain right now. Yields on Spanish bonds surpassed the 6% on Monday for the first time since December, in what could be a nasty comeback of the European debt crisis, this time focused on Spain. The 6% rate level is the benchmark usually used for determining if a country has or not access to financing at sustainable levels, so global markets are getting really scared about the possible negative effects of this situation.
Spain is trying to implement an ambitious fiscal reform, but there are some serious doubts about both the political viability of those budgets cuts and their final effect on the country´s fiscal deficit. Total unemployment in the country is 23.6% and the unemployment rate among young people is an astonishingly 50%. In such a scenario, the government is planning to cut deficits by an additional 27 billion Euro this year through budget cuts and tax raises, which as could expected is receiving a harsh opposition from unions, regional governments and different political parties among others.
Even if Mariano Rajoy´s government manages to fully implement those measures, there are still some strong concerns about how the growth picture will impact fiscal goals. The government can decide to cut expenses and raise taxes, but it can´t really decide how much deficit it will have, because important variables like tax revenues are strongly dependent on economic activity.
It has been seen many times among Sothern European countries: budgets cuts deepen the economic recession, which hurts fiscal goals, and then more budgets cuts are required. Until Spain finds a way to restore growth and attack its fiscal deficit at the same time, investors will have valid reasons to be suspicious about the viability of its economy.
There is no easy solution for Spain´s economic problems, and the situation could be getting worse before it gets any better, there is really a lot of uncertainty in the horizon. But precisely for this reasons, long term investors may want to consider the possibility of adding some exposure to Spanish companies with a long term perspective. The valuations look really attractive due to all these problems, and sooner or later Spain will find a way out of its crisis.
The iShares MSCI Spain Index ETF (NYSEMKT: EWP) which tracks Spanish stocks is trading at levels similar to those it had during its minimum in the 2008/2009 financial crisis. The global financial system was imploding back them, and the world economy was in the middle of one its worst recessions ever. The average P/E ratio for companies in this ETF is below 10, so we may say that the complicated situation of the Spanish economy is already reflected in stock prices.
Telefonica (NYSE: TEF) is the country´s main telecom operator, but it’s also a global company with strong presence in different countries, Telefonica has particularly attractive assets in Latin America which may represent more than a 50% of total revenue in 2012. Telefonica has considerable amounts of debt, which is obviously quite risky in such an economic context, but the company has sustained positive cash flows and earnings during the worst economic times.
Shares of Telefonica are really cheap trading at a forward P/E ratio below 7 and they pay a very tempting dividend yield of more than 11%. Of course, there is always a possibility of dividend cuts if the situation keeps getting worse, but this is a profitable company which doesn´t appear to be teetering on the brink of disaster.
Spanish banks are also temptingly cheap, Banco Santander Central Hispano (NYSE: SAN) trades at a forward P/E ratio below 5.5 and a price to book value of around 0.5, it also has a dividend yield above 14%. Banco Bilbao Vizcaya Argentaria (NYSE: BBVA) caries a forward P/E near 6.5 and a price to book value below 0.7, it yields 9.3% in dividends.
Both of these banks have profitable businesses overseas and they also have a considerable size, which may help them in times of financial turbulence. Like many investors in US banks learned during the last financial crisis, however, it´s never easy to tell if a banking institution is in a solid financial shape, especially in this kind of context.
The economic and financial crisis in Spain is very serious and could easily keep getting worse in the middle term, so there is no rush to jump into any of these positions. Valuations however are extraordinarily cheap, so contrarian investors with a long term horizon should consider some of these assets since sooner or later they will probably produce some outstanding returns.
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