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: A bipolar, if not multipolar, market - (Asia-Pacific markets rose with European and US futures mildly down) – Asia-Pacific markets rose due to macro data that pointed to a higher chance of central banks being able to control inflation without necessarily causing a recession. European and US futures were mildly down.

Response to the crisis: Survival of the fittest - (Spanish corporates fall behind the EU in the recovery of profits (El Economista p24)/83% of corporates created in Spain 30 years ago no longer exist (El Economista Sat p78) – Any downbeat view of Spanish corporate profitability should be a plus in a populist environment in which blaming corporate margins for inflation is quite attractive. It should also be borne in mind when justifying corporate profitability, from a global return on investment point of view, that current profitability has a strong survivorship bias. Current corporate profitability only reflects the contribution of surviving companies, but not the losses incurred by investors on ventures that are no longer with us.

Macro: All that glitters is not gold - (Registered unemployment in May declined by 49,260, with the number of affiliations to Social Security rising by 200,411 (Expansion Sat p27) – The decline in registered unemployment and rise in Social Security affiliations would seem to be objectively good, if it were not for the fact that May has a strong seasonal component tied to the tourism summer high season hiring. Taking this into account the figures do not look as attractive with the rise in Social Security affiliations being the lowest since 2016, with registered unemployment falling the least since 2012 (both excluding, for obvious reasons, 2020). On a seasonally adjusted basis, the slowdown continues, with the usual distortions related to labour market regulation changes.

FCC: Safe as houses? - (Will reduce debt with the sale of a 25% stake in its environmental services subsidiary to CPPIB (Expansion p5)/Considers buying Metrovacesa with the €965m received from the sale of its services business (OK Diario) – The default impact of the sale of a minority stake in a subsidiary is a reduction in consolidated net debt and a rise in minorities. In an environment of rising interest rates and tightening liquidity, lowering net debt would seem an attractive, if conservative option. Using the proceeds to buy a real estate company would certainly be a riskier option. But then again, the FCC controlling shareholder has shown a predilection for real estate investments, which may require a long-term horizon given news such as that below.

Real Estate: Learning at the school of hard knocks - (The percentage of household income needed to buy a home rises to the highest level since the financial crisis (Cinco Dias p20) – With the average percentage of household income needed to finance a house purchase mortgage in Spain rising to 32.3% in 1Q23, this not only would bring us back to 2009 levels but would also be very close to the maximum recommended effort. However, it could be noted that the percentage was even higher at the peak of the bubble at 48.8%). Hopefully, something has been learned since then.

*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.?