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Why Spain Might Be the Best Place to Invest Now

April 16, 2012 | About:
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With the eurozone crisis continuing to unfold, this time the focus is Spain. Spanish market index IBEX is now close to the low it made in March 2009. The ETF that tracks the Spanish market (EWP) has lost 13.6% for the year. The Spanish market valuation is now at its lowest point in at least two decades. Sure, Spain is facing a crisis it never had before. But it might be a good time to invest in some of the high-quality Spanish companies. The valuation of Spanish stock market can be found in GuruFocus’ global market valuation page. The market valuation is measured by the ratio of the country’s total market cap over its GDP. Currently this ratio is sitting at 60%, which is its lowest point in almost two decades. The historical high from this ratio was 194%, a record set during the tech bubble of 1999. At the height of the housing bubble, the ratio was about 140%.

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?

About the author:

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Comments

vgm
Vgm - 2 years ago
The elephant in the room for Spain is banking. Their banks have STILL not recognized the needed write-downs in real estate. And they're huge. They have been the largest LTRO users.

Worst case, if there's a bank crisis in Spain, the Spanish market would sell off dramatically - no matter where the profits for particular companies like STD or TEF come from. That might be the moment to step in.

I know it's best to "be greedy when others are fearful" and "buy when there's blood running in the street". I just think fear and blood could rise from here.

I think your growth projections are very optimistic. The recent dire austerity measures, on top of some 24% unemployment (50% for under 25s) and a collapsing property market, not to mention rigid labor laws that inhibit competitiveness, make any prospects of growth dim. The economy is more likely to contract for years to come.

Spain has partied recklessly for a decade on cheap money. The hangover could be of similar duration. Wilbur Ross has been scouting around for opportunities all over Europe. When he moves in Spain - the way he and Prem Watsa did in Ireland - that will be my signal.
KelpieCapital
KelpieCapital - 2 years ago
The market cap of Apple is now larger than the market cap of the Spanish, Portuguese and Greek indexes combined!

I too am cautiously bullish on Euro Equities....

http://kelpie-capital.com/2011/12/12/europe-be-greedy-when-others-are-fearful/

vgm
Vgm - 2 years ago
We may need to distinguish northern Europe from the southern ClubMed countries. Europe is not a homogeneous mass, but rather a heterogeneous mix. The north is in reasonable shape, the ClubMeds still in difficult waters (no pun intended).

The term "Euro Equities" may therefore be ambiguous, or at least in need of refinement.

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