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: Not as bad as it could have been - (Asia-Pacific markets declined moderately with European and US futures mildly up) – Asia-Pacific markets declined moderately despite a modest rise in oil prices after the Russian geopolitical events. European and US futures were mildly up after a negative week that partly reflected concerns about monetary policy.

Response to the crisis: Time is money - (The Government contains the cost of debt at under 2%, the same level as in 2019 (Cinco Dias p16) – Although there are many things that can be criticised regarding Spain’s handling of recent crises, the Treasury’s strategy in financing the resulting expenditure is not one of them. The Treasury, like practically all its peers, was helped in placing the necessary debt by the central bank’s QE policies, but it made the most of it by lengthening maturities. This obviously lessens the negative impact of rising rates, in the short-term. This is basically buying time. But time is money.

Banks: Shifting the blame - (Banks boost extraordinary dividends in order to lighten capital (Expansion p13)/NPLs rise and will reach 5.8% in 2024 according to EY (Expansion p13)/Bank of Spain governor sees correlation between mortgage rates and deposit rates (Expansion p15)/Spanish banks fear a rise by the ECB/EBA of the capital needs to hold government debt (El confidencial) – Worsening credit quality and potential losses on government bond portfolios are clear risks for banks in the current environment. On this basis efforts to boost net interest margins are logical, as they provides the base for higher provisions. This can be done via restricting remuneration on deposits, which is currently getting bad press, or boosting loan spreads. The former is preferable, as it would have less of a negative impact on volumes. If banks are forced to raise deposit rates they will likely also raise loan spreads (as the Bank of Spain says, they are connected), with the added bonus that they would then be able to claim that they are doing the ECB’s work (to tame demand and inflation). Paying extraordinary dividends is good for shareholders but would partly undermine the banks’ ability to absorb adverse developments, undermining ECB policy, but so would penalising the banks for holding government debt. This is all about shifting the blame.

Macro: Nothing really matters to me - (1Q23 GDP growth was 0.6% QoQ, 0.1pp more than the growth in 3Q22 and 0,1pp more than advanced in April (National Statistics Institute) – The 1Q23 QoQ growth improvement was based on the external sector, as weakening consumption led to a 0.9% fall in domestic demand (vs. the -0.7% of 4Q22). The figures include an upward review of the provisional figures for 1Q23 (0.1pp) and also for past periods (as the YoY growth was revised up by 0.4pp). The main conclusions are that the external sector is what is keeping Spain’s figures up and that worrying about the precise numbers is useless, as they are likely to be revised.

Macro: More in, less out - (The current account balance showed a surplus of €10.3bn in 1Q23 vs. a deficit of €4bn in 1Q22, due to tourism (Cinco Dias Sat p27) – The improvement in the tourism balance made a significant contribution to the swing in the current account balance, rising from a surplus of €7.4bn to €10.5bn, although so did the improvement in the goods deficit which declined from €14.2bn to €4.1bn. The above is a good example of the extent to which tourism and energy have been the drivers of the Spanish economy.

*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.?