Take 5 and come back tomorrow

First of all, let’s be clear. The following is not investment research/advice. And, as such, it involves no investment recommendations. These are my thoughts on Spanish equity issues, which I find relevant. I share them freely (and not just as regards price). As always, I am only trying to help. Please read the rest of the “discomplainer (*)” at the end of the article.

Market environment: Unsteady progress - (Asian markets were mixed but futures point to a decline in Europe due to weakened sentiment regarding Covid) – The markets eased off on Friday and Asian markets today were mixed. Futures point to some weakness in Europe, with the forecast for the US being more variable. We continue to be stuck in a fight between economic optimism and fears of a Covid rebound. With geopolitical tensions (US-Europe, US-China and Brexit) still in the background.

Response to the Covid-19 crisis: The worst is behind us, and coming up fast - (A divided EU fails to agree to a recovery plan which is urged by the ECB as “the worst is still to come”) – The initial meeting to discuss the European recovery plan did not end in agreement. But I doubt anyone seriously expected it to. The ECB trying to urge an agreement, by stating that the worst is still to come, is completely understandable, as otherwise the bulk of the effort to offset the economic impact of Covid would fall on its shoulders. Fortunately, its statements do not seem to have had a very negative impact on sentiment. There seems to be wide agreement that a deal will be struck in July. Hopefully, this will be the case.

Hotels:  Dodging the bullet in the foot - (UK tourists allowed to enter Spain without a quarantine, while the Minister for Tourism says that it is key to show that Spain is a safe destination and the lack of bookings lead to 35% discounts in hotel prices) – The Spanish government swallowing its pride and not imposing a quarantine on UK tourists, despite the quarantine imposed by the UK on arrivals from Spain, makes sense. The UK is the largest source of tourists to Spain, and anything else would have been a case of shooting oneself in the foot. Unfortunately, the UK quarantine (and Foreign Office advice to restrict foreign travel) is still in force, which should weigh on UK tourism to Spain. But at least Spain does not have a comparative disadvantage. Efforts to paint Spain as a “safe” destination are hampered by its track record in handling Covid, and the advertisement produced to support foreign tourism, featuring a number of world famous personalities, is unlikely to help, as it is thoroughly depressing. Given the above, 35% discounts are painful, but understandable.

Banks: Bait and switch - (Banks have granted €70.484bn in government guaranteed loans (with total guarantees of €53.917). SMEs and self-employed workers have been granted €49.917bn in loans (with €39.895 guarantees, while the Government freezes the Podemos proposal of a tax on banks) – The programme of government guarantees for bank loans is increasingly looking like a covert bailout, as what seems to be going on is that banks are replacing loans guaranteed by SME owners/self employed workers, and their real estate assets, with new ones mostly backed by the Government (via the ICO development bank). There is nothing wrong with this, as it should prevent a large number of employers from going under, but the track record of eventual delinquency in such loans, if the crisis proves to be a long one, as was the case with the last one, is not good. Given the perceived need for the bailout, freezing a tax on banks would also seem to make sense.

Telefonica: Floating on the tide - (Telefonica’s Chairman says that his company’s best protection against hostile bids is execution of its strategic plan, that it is open to deals but only if they create value, mostly in LatAm and Europe, that the dividend is sustainable and that debt reduction will continue as the goal is to preserve the rating) – Telefonica’s Chairman seems to have been on a media blitz recently. His answers to the questions tick all the right boxes, but without providing any clear individual catalyst for performance (other than successful execution of the strategic plan). This seems to be a case of trying to float on a rising tide.

*The above information has been read/understood/summarised/evaluated/copied as well as I could to provide a guide to Spanish equities, given available timing/intellectual constraints, and I accept no liability for misreading and/or mistranslating the original copy as set out in my previous article (which I urge you to check, as I am only trying to point you in the right direction, I hope). As for what you may decide to do, after reading the above, please contact your legally approved provider of investment advice on Spanish equities.