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: Another day in the office - (Asia-Pacific markets were mixed with European futures up and those for the US mildly down) – Asia-Pacific markets were mixed in part due to fears of further China-US trade tensions. Futures for Europe point up and those for the US mildly down.

Response to the crisis: Handing out the goodies - (The Government approves €9bn in aid through 2024 in its last large decree (Expansion p28)- Handing out the goodies (or in this case extending the handing out of the goodies) ahead of an election is hardly a surprise. But it highlights the Government’s approach to any problem, which is to throw money at it. This is “fine”, as long as you are able to finance (or have the ECB finance it). At some point, hard choices may have to be made.

Banks: You have to take the bad with the good - (Lagarde says that there is no ceiling for interest rates in the short term (Expansion p15)/ Cetelem warns of the first delays in loan payments (Cinco Dias p5) – The ECB continuing to raise rates should be positive for the banks’ NII (as long as they do not have to fully reflect them in deposit rates). But this is not the whole story. What is gained at the top line may be lost further down the P&L, as higher interest rates lead to worsening credit quality and calls for even more “windfall taxes” on the increased earnings. You have to take the bad with the good.

Pensions: Visiting the sins of the fathers on the children - (The average retirement pension grows already 9.6%, three times more than inflation (Expansion p30) – Pension payments are rising strongly due to past inflation, as workers with higher wages reach the retirement age, and current inflation, as pension payments are CPI-linked. An effort has been made to try to offset the increased payments with higher revenues for the system via higher payroll tax. But in a pay as you go system, anything that discourages increased employment/wages (as by definition are higher payroll taxes) does not really help the situation.

Budget: Not my problem - (BBVA Research estimates that Spain will have a budget deficit of 3.5% of GDP in 2024 and will not meet the EU fiscal rules (Expansion p31) – A slowing economy is a threat to a healthy fiscal position, especially if fixed expenses have been boosted in the good times. Any attempt to control deficit spending is also likely to worsen the situation of an economy which has been using debt as one of the main engines of growth. On this basis, EU fiscal rules being reapplied, leading to the need for austerity, would certainly make the situation worse, especially as, if polls are to be believed, the situation would have to be handled by a conservative government, giving the left a good opportunity to be populist/irresponsible.

*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.?