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: Vaccine side effects - (Asia-Pacific shares rise with futures for the US and Europe pointing down) – Asia-Pacific shares rose, after the strong showing in Europe and the US on news of significant efficacy of the Pfizer Covid vaccine, although moderated by modest Chinese inflation that may point to weakening demand. Futures for Europe and the US point down.

Response to the Covid-19 crisis: Not one of us - (The PP wants to bail out self-employed workers using €2.4bn saved by ministries) – Self-employed workers are disproportionally impacted by Covid-related restrictions to hostelry activity in most of Spain. And they lack the trade union support to which the current government is receptive. On this basis, providing them with support financed by administrative running cost savings would seem to be a useful approach. Even if savings elsewhere were not available, the Government’s “spend, spend, spend” mantra would provide justification for additional effort. Unfortunately, self-employed workers (unlike public sector workers and pensioners) do not seem to be regarded as a key constituency by the Government.

Vaccine rally: Act surprised - (Markets rally strongly, Ibex +8.57%, on news that the Pfizer vaccine achieves 90% efficacy) – International markets rallied strongly, with rotation from tech to more cyclical names, as a result of the announcement by Pfizer that its Covid vaccine achieved 90% efficacy in tests. The strength of the rally, even if it gradually lost steam, is somewhat surprising. Most comment on the market up to now seemed to be operating on the hypothesis that a vaccine would be available by year-end/early 2021 and that mass vaccination would take place in 2H21. If it were not the Pfizer vaccine, it would be one of several other candidates currently undergoing tests. Significant efficacy was a given, as otherwise it would be difficult to get approval. On this basis, it would not seem that much has really changed in terms of the basic scenario, with the main problem remaining the economic damage that might be caused to the economy until widespread effective vaccination takes place.

Banks: Creating badwill - (A PWC report points to banks having to cut costs by 25-50% in order to be profitable, fearing a significant wave of NPLs) – That banks will have to offset top line pressures with cost cuts has been evident for some time. The problem is that the top line pressures come at the same time as a potential rise in credit quality erosion, providing limited room to accommodate the required adjustments without eating into capital. Creating badwill via mergers is likely to be the chosen solution.

Repsol: Divide and conquer - (Respol is said to be preparing the IPO of its renewables division in order to protect itself against a potential foreign bid) – Given the market appetite for renewable investments, carrying out an IPO of the Repsol renewables division could be a useful way of highlighting its value. It’s effectiveness as a deterrent to a bid for Repsol is less clear, unless the Repsol share price fully reflected the market value of the new listed unit. Otherwise it would mark Repsol as an even more interesting target, given the potential for a profitable break-up of the resulting conglomerate.

*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.