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: What goes up must come down - (Asia-Pacific markets fell with futures for Europe and US pointing down) – Asia-Pacific markets decline due to fears of aggressive Fed action despite the positive impact on Chinese property of lower rates. Futures for Europe and the US point down.

Response to the crisis: Already done our bit - (The Government will renew the complex negotiations for an agreement on profits and wages) – The main tool to prevent second round inflation effects is to reach an agreement for control of prices and wages. But, unfortunately, this usually involves a loss of purchasing power on the part of consumers, as this type of agreement is only put in place once inflation has gotten out of control. In this occasion, it does not help on the “profit” side that the government has distorted the picture by creating new taxes on energy sector companies and banks. Since they are already making a “contribution” (including threats if they try to pass the tax on to customers), corporates will probably have less inclination/capacity for restraint on prices than would otherwise have been the case.

Banks: Mi casa es su casa - (12-month interbank rates move ahead of the ECB and register a year high of 1.258%/72% of mortgages in Spain are variable rate (€275bn) and should see an improvement in returns) – The majority of mortgages in Spain are variable rate, which means that banks stand to benefit from a more aggressive ECB monetary policy (or the expectations of it) via higher interest rates. The problem here, as stated above, is that banks will have a considerable part of the improvement “expropriated” by the Government via the new tax on bank revenues. And, unfortunately, due to the Government efforts to try to avoid a legal challenge against the tax on the basis of profits being taxed twice (which may prove unsuccessful) the object of the tax is not profit (although it is presented as a tax on “windfall profits”) but revenues, including NII. This is negative, as a higher interest rate environment is likely to result in higher NII but also higher NPL provisions. And there is no compensation in the tax for the latter.

Hotels: Voyage of the damned - (Melia, Barcelo, Riu and NH accelerate hotel openings due to the reactivation of tourism) – Hotel management is partly like blackjack, as you risk either being too conservative with capacity (and missing out on potential revenues) or have too many rooms available (depressing RevPAR). The summer season is turning out to be a very good one (although more from the point of view of occupation rather than ancillary revenues). But there seems to be a certain “voyage of the damned” character to it (i.e. have fun while you can, as autumn/winter, and even next summer, is looking dark). On this basis, having as much capacity available as possible makes sense. Whether this should be extrapolated to the future/multiples is another matter

Naturgy: Hopefully they know what the are doing - (The Australian IFM fund controls almost 14% of Naturgy) – The fact that IFM keeps increasing its stake in Naturgy in the current environment is likely to send a positive message. Although Naturgy is originally a “natural gas” company (that was its original name) it is a “natural gas” company that does not own much natural gas. Thus, it depends on contracts with suppliers. The fact that IFM, which is now on the Board, keeps buying offers some comfort regarding the terms of the contracts.

*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.?