As discussed in detail in the global market valuation page, the valuation of a country’s stock market is measured by the ration of its total market cap over GDP. The Spanish market is measured by the relative value of the index IBEX and Spanish GDP. Spanish GDP is shown here:
The historical market cap normalized by IBEX is shown below:
The ratio is shown below:
The projected return of the Spanish market for future years is more than 17.5%. This is based on an economic growth of about 4% a year, a dividend yield of 6% and a valuation reverted to the mean of 7.5%. It is very likely that the Spanish economy may not be able to grow 4% a year in the next decade, but the high dividend yield of its stocks and lowest valuation may reward patient investors.
Investors have thrown in the towel with Spain. Anything that bears the name of Spain is sold out without regard to the fact that they only have a small portion of business in Spain. Examples here are Banco Santander (STD) and Telefonica (TEF).
Banco Santander (STD) has a small percentage of their income from Spain and Portugal and very big exposure to Brazil and South America which is growing nicely. The company has good management in the sense that they are very conservative in their lending practices. The dividend yield of the stock is now above 10%. Read more about Banco Santander:
Banco Santander: The Good, the Bad and the Ugly
Valuing a Bank: Growth, Asset Quality and Management
Telefonica (TEF) generates 72% of consolidated revenue and 67% of EDITDA outside its fixed and mobile businesses in Spain. Investors are worried about its debt of about 56 billion euro, although only about 20% of the debt is dominated in the euro. For 2011 The company generated 9.27 billion euro in free cash flow. The debt services cost them 2.9 billion euro, which is comfortably covered by the operating cash flow. The dividend yield of the stock is now above 10%. Read more:
Telefonica - Undervalued Dividend Stock with Strong Emerging Market Exposure
How to Profit Amid the Pain in Spain
As always, the best time to buy is when there is blood on the street. A good approach might be buying a basket of stocks. Didn’t Warren Buffett say he bought eight European stocks in the second half of last year?