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: Don’t pour oil on the fire - (Asia-Pacific markets rose as do European and US futures) – Asia-Pacific markets rose due to a dovish stance by Fed officials, feeding hopes of a softer monetary policy. Futures for Europe and the US rose.

Response to the crisis: More of the latter - (Repsol, Inditex, IAG and Ferrovial gain with higher rates (Expansion p3) – Large companies that have a free cash flow/negative working capital model should benefit in a rising rate environment. And even more so those that profited from the ultra low-rate environment of the last years to issue bonds, whose resulting cash is now being more generously remunerated. But the flip side are SMEs which are suffering the higher rates (and in some instances are on the other side of the negative working capital proposition). Unfortunately, in Spain there are more of the latter than of the former.

Banks: Carrying the seeds of their own destruction - (The ECB vice-president sees a certain improvement in the profitability of banks (Expansion p15)/The Governor of Bank of Spain asks the banks to use part of their profits to reinforce their solidity (Expansion p16) – I have already commented on the fact that current bank profitability carries the seeds of its own destruction.nbsp; Higher rates initially lead to higher NII, especially because of the lag in the rise in rates being reflected in higher retail funding costs and worsened credit quality. But eventually there is a reckoning. The key here is not to restrict dividends (or increase retained profits, which is the same thing), but to have a pro-active approach to provisions.

Cellnex: Jam tomorrow - (Cellnex and other tower companies lose the markets favour due to doubts about the business (Cinco Dias p3) – Cellnex is a high duration stock. Those usually do not do all that well in a rising rate environment. Unless you can make the case for an expanding “residual value” in valuation models (i.e. a “growing pie”). But for tower operators consolidation means eating into the potential pie (which is not growing). It has always been a case of bread today, jam tomorrow. But what if there is no jam tomorrow?

Macro: Spreading them out - (The length of labour contracts falls to its shortest since 2006 (El Economista p25) – This is not specific to Spain. Despite attempts to regulate the labour market, the main growth area in employment is temporary (although no not considered temporary i.e. fixed discontinuous) and part-time (now not considered part time for retirement contribution purposes) jobs. It does not help if the focus of regulation is not to create jobs but to spread 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.