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: China, again - (Asia-Pacific markets rose with futures for Europe and the US up) – Asia-Pacific markets rose on hopes of a relaxation of Covid restrictions in China. Futures for Europe and the US are up

Response to the crisis: Look the other way - (The EC approves a further payment of aid to Spain but fears a fiscal deficit due to pensions) – The EC approving a further €12bn payment to Spain under the Next Generation fund (pending approval by the national governments) is good news, even if deployment of the cash already received seem to be lagging. This said, I am not clear that the “reforms” that were required for the disbursement are really effective. But it would be a political failure for the EU to not be able to disburse the funds, so it is easier to look the other way. And, yes, public pensions are a ticking time bomb given indexation to runaway inflation.

Utilities: Virtue signaling - (The Minister for Ecological Transition points to the Italian model which has a 25% windfall tax on energy companies) – Taxes on windfall profits are a good example of Government virtue signaling. For starters the “windfall profits” are already taxed under the existing corporate tax. For another, the “windfall profits” are, if they exist, mostly derived from the kind of clean energy that the governments are meant to promote (i.e. fossil fuel plants have higher income but, unlike clean energy, higher costs). Additionally, it is likely that the generators will seek to pass on the cost.

Iberdrola: If you do not like the rules, change the rules - (The public prosecutor demands €100m from Iberdrola due to allegedly having altered prices in 2013) – The wholesale electricity “pool” market is an auction. In an auction all participants try to maximise their profits. Unless there is concerted action, if one player bids a high price, someone else might step in and take a greater share of volume. The basic problem is the imbalance in generation technologies between the participants (having more hydro is an advantage). Maybe the solution would be for all participants to have the same generation structure to level the field. But, as I’ve said before, Iberdrola has been attacked over the years for holding back hydro generation or using too much of it. If you do not like the system change it. But don’t blame the participants for playing by the existing rules.

Macro: Paying the price - (May wholesale prices grew 43.6% YoY vs. 44.5% in April, with prices ex energy rising 15.3% vs. 15.6%) – The mild slowdown in the growth of wholesale prices is a positive. But the rate of growth is still exceedingly high, which means pressure on corporate margins or translation into higher retail prices. The fact that prices ex energy have eased less than overall prices is not good news as it would seem to point to inflation becoming entrenched at high levels.

*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.?