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: The Middle East exporting more history than it consumes - (Asia-Pacific markets were little changed, with European and US futures lower) – Asia-Pacific markets were little changed despite the increased tensions in the Middle East. Futures for Europe and the US were lower.

Response to the crisis: Choose your poison - (Electricity prices will rise 26% if the government tax aid is not extended (Cinco Dias p6) – I have already talked about temporary measures having a habit of becoming permanent (it’s always not the right time to remove them) and there being no free lunch. The plan regarding tax cuts offsetting energy price rises is that eventually prices will fall and subsidies can be removed without anyone noticing. But if prices do not fall then it becomes a choice between higher prices and higher budget deficits. Choose your poison.

Banks: No one is ever truly neutral - (The EC puts at risk €2bn in insurance and bank revenues in Spain (Cinco Dias p15)/The ECB believes all Spanish banks are short of capital and should devote profits to reserves (OK Diario) – Whether Spanish banks are short of capital is a contested notion. In theory, Spanish banks should be relatively safe from financial crises, as they have a dispersed risk portfolio (retail banking) which should be resilient against unexpected shocks. But Spanish banks have dispersed risk and also high exposure to variable rates. Higher rates might be positive for banks, but not if it endangers credit quality and commission income is also threatened. This might suggest that Spanish banks should increase their provisioning efforts, even at the cost of dividends, but this would not be a neutral scenario.

Utilities: Who does the bell toll for; it tolls for thee - (Iberdrola, Endesa and Repsol release a tsunami of sales of renewable assets (Expansion p4)/Iberdrola increases the cost of contracts signed for 500MW in the US up to 50% (El Economista p13) – If renewables were such a good (cheap) solution to the world’s energy/climate problems no one would want to reduce their exposure to them or demand higher (regulated) returns for investing in them. But large energy incumbents want to sell minority (basically half) of their stakes in renewable projects, so they can maximise their PR/virtue gains while minimising their capital allocation. But in order to do that they need high enough valuations to justify a sale. And who is going to pay for this. Do not ask who the bell toll for; it tolls for thee.

Taxes: If it moves tax it, if it continues moving regulate it, if it stops moving subsidise it - (Ibex companies pay in taxes 45% of their pre-tax profits (3x their dividends) and return to pre-Covid levels (Expansion p20) – Ibex member companies are highly taxed (helped by the fact that they suffer specific taxes on the bank and utilities sectors, which have their own “windfall taxes”, and have a high representation in the index). So, this is not an unintended effect. But this does not prevent criticism regarding the high profits of those companies (which are now highly taxed). And on top of it, it is a consensus criticism of Spain’s economy is that it does not favour the creation of large companies which via economies of scale can achieve higher productivity. We don’t favour them, but we tax them.

*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.