Has pessimism on Spanish stocks been overdone?
MarketWatch/Tim RostanA stretch of Calle Rios Rosas in Madrid featuring an all but uninterrupted line of bank branches, including BBVA and Caja Madrid. Neighbors include Banesto, Banco Santander and others.
MADRID (MarketWatch) -- Investors may not be ready to rush back in just yet, but several analysts said Friday that the selloff in Spanish stocks has been overdone.
In marked contrast to the rest of Europe, the Ibex 35 index (IBEX) rallied Friday, gaining 1.5% to close at 6,876.30, as banks rose partly on relief that the audit results released Thursday contained no big surprises. Yields on 10-year government bonds (10YR_ESP) fell 26 basis points to 6.31%, according to Tradeweb, putting more distance between themselves and the panicky 7% levels breached at the beginning of the week. See full story on the auditing consultants' Spain banking report.
The IBEX -- Europe's worst-performing index in 2012 -- gained 2.3% this week, bettered only by peripheral counterparts. Greece's Athens General Index (GD) climbed 8.6% for the week, while the FTSE MIB Italy index (FTSEMIB) gained 2%. The Stoxx Europe 600 index (SXXP) was 1% higher for the week.
Markus Huber, head of German high-net-worth trading at the financial spread better ETX Capital, said the current rally is mostly a technical bounce, in reaction to the "overdone selloff" that started in February and stretched through May.
"No doubt the pessimism in regard to Spain has been overdone," said Huber, in emailed comments. "Yesterday's figures from the independent audit turned out a lot lower than expected, and strongly retreating peripheral yields seem to be confirming this view. The same two reasons are giving the IBEX a lift today."
Auditors on Thursday revealed that 14 of the country's banks -- Santander SA (SAN) (SAN) and BBVA SA (BBVA) (BBVA) and
In addition, analysts said Spanish banks had gotten a lift from speculation, later confirmed Friday, that the European Central Bank would loosen up its collateral rules for loans. That's expected to help ease pressure on southern European banks.
Daniel Pingarron Salazar, market strategist at IG Markets, said markets have underestimated the "real situations" of Spanish banks and stocks.
"There were some agencies that suggested Spanish banks needed around €120 billion of extra capitalization through [the European Stability Mechanism or the European Financial Stability Facility]. That amount was completely exaggerated and definitely false," said Pingarron, in emailed comments.
The next market hurdle for Spain and its banks are the revelations of the bailout amount, terms and conditions. The government is to make its official request Monday, Finance Minister Luis de Guindos revealed Friday afternoon. Whether Spain's banks get loans directly or channeled through the government will make a difference to sentiment, said Predrag Dukic, senior equity sales trader at CM Capital Markets in Madrid. See Market Pulse on de Guindos's announcement of the aid request's timing.
"Direct money means the state has a lower burden on its shoulders and gives us more time and also shows the markets that, if the bailout money goes directly into banks, the EU is going to demand more for restructuring and be tougher on those banks," said Dukic.
The International Monetary Fund's Christine Lagarde reportedly said Thursday that the euro zone needs a mechanism to let it directly recapitalize weak peripheral banks, "to break the negative-feedback loop that we have between banks and sovereigns."
Bond yields have been under pressure in Spain because if loan funds are given to the government and funneled through the government's Fund for Orderly Bank Restructuring, they are given senior creditor status, with investors second in line, according to analysts say.
In a research note published Friday, Joel Copp-Barton, European product director at Invesco, said Spanish companies have been punished across the board by association while the market has ignored much of the government's "significant" reform agenda.
"We believe the negative sentiment towards anything Spanish is providing some very attractive investment opportunities in several companies that have strong business models, good management and a high proportion of their sales outside the euro zone," said Copp-Barton.
He said most of his firm's European equity funds are overweight Spanish stocks. One of two companies they like is oil an gas group Repsol
The Spain domicile has been a bigger kick for shares. Repsol trades at a 2012 enterprise value versus earnings before interest, taxes depreciation and amortization of 5, below the sector average of 6.2. That multiple "significantly undervalues" the growth prospects of Repsol, he said.
Shares of BBVA SA (BBVA) (BBVA) have also been punished during the banking crisis, despite the company's diverse geographical spread, Copp-Barton said. Assessing the market values of local banking operators in BBVA's overseas operations, and applying similar ratios to BBVA's overseas earnings, suggests an overly pessimistic negative value is being applied to domestic operations, he said.
Analysts at Credit Suisse said in a note Friday that Spain remains in danger of a full-blown bailout, because the ultimate bank recapitalization could further pressure Spain's public finances and send borrowing costs soaring again.
ETX's Huber said overhanging any good day for Spain's stocks is high unemployment, a high budget deficit and bad loans that are having a negative impact on the private sector, weighing on growth and pressuring public finances for years to come, making deficit-reduction targets difficult.
"Also, all of these factors are not only posing a problem for Spanish banks but also for many major Spanish companies who are already struggling with high debt possibly needing, at some point, government assistance in order not to fold," said Huber.
Dukic said investors will be looking to the June 28-29 European Union summit for at least a temporary solution to euro-zone problems and, in turn, an easing of pressure on Spain. "They're not ready yet for the big fix ... [We will] see the temporary fix, go away for the summer, and when we come back the saga will continue and we'll start looking for the next major bailout."