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: An optimist is a badly informed pessimist - (Asia-Pacific markets rise as do futures for Europe and the US) – Asia-Pacific markets rose on greater optimism regarding Covid-related unrest in China and Fed monetary policy. Futures for Europe and the US are up.

Response to the crisis: This is your life - (The Social Security Minister wants to expand from 25 to 30 years the period to calculate the pension and to be able to not take into account the two weakest years) – Given Spain’s demographics and the indexation of pensions to inflation the main way to try to control the rise of pension payments would be to recalculate their amount of new pensions. Extending the period for calculating the wage on which the pension is based to almost the entire working life is one of these (on the assumption that workers see rising wages during their career, thus leading to a lower pension relative to the last wage). By definition this means a future pension cut, which is negative for the workers but good for the system. The problem is that in order to sell this the Government is also likely to focus on higher payroll tax payments by corporates.

Banks: Victim is a better look - (The Bank of Spain Governor calls on banks to use higher profits for provisions/Santander warns that the agreement on mortgages will have a significant cost/Banks will have to provision €1bn due to aid to mortgage holders) – Calls by central banks for greater provisions ahead of an expected recession are traditional. And usually ignored. This is usually followed by central banks frowning on dividends being paid on the resulting higher profits. The idea that the new code of conduct will lead to higher provisions is a useful one. For the banks. Most of the provisions involved would have to be taken anyway (we are talking about clients with difficulties to service their loans). In that situation, it is better to look like a victim than the bad guy.

Taxes: Crime without a culprit - (Sabadell believes that it is inevitable that the new tax will be paid by clients/Banks threaten to sue against the new tax before the courts) – The Government insists that it would be illegal for the new tax on bank revenues to be passed on to customers. So, Sabadell is being somewhat subversive. But in practice it is simply pointing to the obvious. It is very unlikely that any bank will include a specific charge for “the new tax”. The price of goods and services should include all the costs involved in their production (including a competitive return). And the assessment of overall costs will lead to a new price (including the effect of the tax). If the tax is not deemed illegal, that is.

Macro: A little trouble - (According to the General Council of Economists bankruptcies will rise by 20% this year, double the global level/Unicaja fears a rise in SME NPLs/ The CaixaBank CEO says that it is possible that rates will have to rise to 4% to fight inflation) – An economic slowdown usually has an outsized impact on the weaker corporates, which is to say SMEs. This would be the result of both higher interest charges and the economic slowdown caused by higher rates. If inflation is to be tamed, demand has to be destroyed. And countries, such as Spain, with a high weight of SMEs are likely to suffer the most.

*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.?