Some good reads from around the Web.
I once asked readers to admit they were nostalgic for the turbulent days of 2008 and 2009, when banks were going bust and stock markets were a bargain.
The post was slightly tongue-in-cheek, with my idea being to remind readers that the bad days don’t last forever, even if the headlines take a while to change.
There is a reason to lament more stable times, though, and that’s that buying cheap is the best guide you’ll get to good future returns from equities.
And cheapness tends to come hand-in-hand with fear and turmoil.
Spain is still partying like it’s 2009
Given how I supposedly love cheap markets and can look through bad headlines and gyrating share prices, I have asked myself if I should be putting more money to work in Europe – and in particular Spain.
While the economic slowdown has dragged on everywhere in the Western world, Spain feels like the clock stopped three years ago.
It’s several years ago that the US and UK authorities forced a bailout of their banking systems. Spain is still doing it. Last week saw its fourth attempt to shore its banks, after the all-but nationalisation of one of the biggest domestic lenders, Bankia.
And while Obama may be tearing his hair out about stubbornly high unemployment in the US, compared to Spain’s 24% rate, the US rate of around 8% seems a boon. UK GDP is dipping, but it’s diving again in Spain.
The credit crisis that nearly froze international trade and finance is still spluttering in Spain, too, albeit more evident in the very high yields on Spanish government bonds. The government’s move on Bankia was partly a response to rising fears among Spanish savers over the safety of their money.
Costa notta lotta
Given all this – replicated to a greater or lesser extent across peripheral Europe – why would anyone consider investing in Spain?
Because it’s seemingly dirt cheap, of course.
The Spanish market is down roughly 25% on the year, with the index flirting around the level it touched in early 2009.
In contrast US markets were recently making new highs. Even after its recent falls, the UK’s FTSE 100 is up over 50%.
This weakness is reflected in a very low P/E rating for the Spanish market of around 7.5, according to FT data. That compares to over 10 in the UK (still not exactly expensive) and around 14 in the US.
You might think that a low P/E is warranted, given Spain smells about as healthy as a morgue during a mortician’s strike. As a fan of the country and a semi-regular visitor, I don’t disagree it’s tough there.
My Spanish friends confirm the country is in a right mess. The structural problems behind youth unemployment are almost worse than the headline figures. Much of what makes Spain so great – such as its hedonistic lifestyle and its family-focused culture – is partly to blame for its woes. Then you have issues like an entire generation raised on consumer credit, who make British 20-somethings look like a legion of proto-Warren Buffetts.
The root and consequence of Spain’s problems is a crazy property boom that took people out of real jobs, took money away from productive investment – and that incidentally acted as a cesspit for much of the easy money that flowed here in Britain 5-10 years ago, too.
It’s very difficult to gauge how much of this has been unwound, but again the hidden cost (graduates who eschewed careers to work on building sites, for instance) could be even worse.
But there’s a but as big as any you’ll see at any Greek wedding.
Spain is international, too
The leading companies in Spain are as multinational ours or Germany’s, and more so than America’s. Even the big banks like Santander make the bulk of their money overseas.
It’s therefore somewhat irrational for shares in Spain to be particularly hard hit by the problems at home. They will certainly suffer in a worst-case scenario for Europe, but arguably the more highly-rated US ones will do at least as badly if the global economy turns south as a result.
Some of the discount is warranted because the big financial companies have a life-threatening Spanish asset base, even if they theoretically have plenty of productive assets overseas.
We all know now that a bank can be wiped out if a minority of its assets flounder. The surviving Spanish banks (most of the little ones have gone) have been setting aside money to reflect their shaky property loans, but nobody knows how much is enough.
You might also argue that there’s a certain markdown that’s justified because of the chaos that ejection from the Eurozone could cause.
But perhaps the biggest fear in a country that was a dictatorship in living memory is a return to those truly bad days. If Spain turned into a basket case like Argentina, we could see one of those once-in-a-century blow-ups that makes looking at the historical returns from international markets so revealing.
I don’t think that’s likely, and I believe Europe can cope with its problems – at least to an extent that will eventually justify much higher share prices.
In fact, some of the solutions to Europe’s woes such as restructuring in the South and higher spending by Germany could be a positive boon for corporates.
However so far I can’t bring myself to go overweight on Europe, even though I’m not a pure passive investor and I think the markets look cheap. I have considered buying shares in the likes of Santander and Telefonica, but instead I’ve restricted myself to tilting some of my index fund allocations more in Europe’s direction.
I’d be interested as ever to hear what everyone else thinks in the comments!
More reading on Europe and Spain:
- Peston: Has Spain flunked the banking test? – BBC
- Flanders: Europe, growth and austerity – BBC
- Is crisis-hit Europe a place for investors? – FT
- The Euro crisis: Europe’s Achilles Heel – The Economist
From the investing and money blogs
- Horseshoes, handgrenades, and asset allocation – Rick Ferri
- The shocking international experience of the 4% rule – Wade Pfau
- 80-20 your career – Free Money Finance
- Price of happiness rises to £20,000 [sort of!] – Ahead of the Curve
- What I learned from my parents about money – Simple Living in Suffolk
- Do I need emerging market stocks? – Oblivious Investor
- Dividend floodgates widen [US S&P 500] – Investing Caffeine
- Why do ships have lifeboats? [On complex ETFs] – The Munro Fund
- Angels, pinheads, capital gains, and dividends – The Psy-fi blog
- Food rules – a shortcut to better health – Mr Money Mustache
- Defending revamped investment trust ‘ongoing fee’ data – The AIC
Book of the week: I’ve been re-reading Charles Ellis recently. His Winning the Loser’s Game
Mainstream media money
- Op-ed: It’s game over for the climate – New York Times
- Facebook floats next week – The Economist and The Telegraph
- Hope and poverty – The Economist
- Natural gas: Awash in the stuff – The Economist
- Longer commute, bigger waistline – The Atlantic
- Eurozone holiday home sell-off – FT
- Why buybacks are a ‘steal’ – FT
- Full state pension for stay-at-home mothers – Telegraph
- Richer, richer: Highest-end house prices still rising – Telegraph
- How cost effective is your gadget? [Slideshow] – Telegraph
- [The Monevator effect?] Trackers outselling active funds – Telegraph
- The Blackrock World Mining Investment Trust – The Independent
- How budget airline fees add up [Graphic] – The Guardian
Like a good read on the weekend? Then subscribe for free!
Comments on this entry are closed.
“Winning the loser’s game” is by Charles Ellis. Your link goes to the right book on Amazon but you’ve got the author wrong.
A pedant writes: I think you mean “The Monevator effect” – not “affect”.
Oh dear, thanks chaps. I have paid for racing to beat the email sending window deadline (which I missed anyway, so most people won’t see this article until tomorrow. Darn!)
Been reading Bernstein and Ellis recently, hence the switch. In fact, I think I linked to Ellis a couple of weeks ago. Ho hum, ‘Pillars’ next week!
I’ve recently bought into Jupiter European Opportunites and have an order pending for a Cazenova European fund all lined up and ready to go.
I’m not going over-weight by any means, but am starting to roll some money into Europe.
I saw this week that the Bundesbank is going to accept higher inflation!
I’ve been looking at Santander recently with a view to getting them less as a play on Spain than one on Latin America, but the exposure to the Spanish property market they have is pretty scary. But if the shares keep getting battered I might go in with a halfweight buy.
iShares MSCI Spain Index (EWP) fund might offer a way to gain a little bit of extra exposure. Santander and Telefonica make up about 20% each of the fund. In the last 12 months the fund has lost about 25%. The iShares data sets a P/E ratio of 11.3 and a Price/Book of 2.07 for the fund. It’s an ETF so there will be a dealing fee involved. Similar to the commentator above if the fund continues to spiral down I might channel a little bit of extra cash its way! Or I could just up my general index allocation to europe where Spanish equities already feature in the funds I own.
I worked in spanish equities for 27 years, sold everything in 2007 and left the business in 2010. I started buying spanish shares again 2 weeks ago. Ferrovial, acerinox, bbva and small industrials. All have significant foreign businesses and some export 97 pc of their production.
Thanks for thoughts all. The pessimism about Europe/Spain is intense, and the tricky thing is at least some of it is warranted. But how much?
Had dinner with some people including a pretty clued-up banker friend yesterday who sounded even gloomier than usual about Spain. The world needs more gloomy bankers, but I can’t help thinking in general they might have done better to get religion 5-6 years ago.
I may postpone any direct equity purchases until the situation is a *little* clearer I think. Not “Spain is saved” clearer, but perhaps post a Greek exit and a test of the firewall etc.
The Germans are sounding more ready for higher inflation this weekend, anyway, which is a positive (in relative terms): http://www.spiegel.de/international/europe/bundesbank-signals-germany-would-accept-higher-inflation-a-832457.html
> perhaps post a Greek exit and a test of the firewall etc.
Blimey, you’ve finally raised the white flag at last on this! Head for the hills or fly into the storm, that is the question 😉 Early days, as yet IMO.
Curiously EWP seems to be from the US iShares stable, there doesn’t seem to be a LSE denominated Spain ETF.
@ermine — Hah! Well my furry friend, to be fair Greece is proceeding as I’ve roughly thought it would from the start (not that I’m any expert on macro economics!) albeit it a faster timetable. I can’t remember how much I’ve written on Monevator as I don’t like to add too much to the macro noise, but for example a quick search for corroborating evidence is my post from May 2010:
However I then went on to say:
That’s still my position. And of course I could still be wrong! 😉
There are massive structural issues which I discussed on my currently defunct side blog Stock Tickle, but I don’t think anyone has the appetite to correct them. So perhaps Spain and some of the other PIIGS slope out of core Europe in a few years when they can’t meet some new target in the post-crisis era, after a few years of actually working out how to do it.
If Greece leaves we’ll know more, I suppose. A lot of supposedly catastrophic events aren’t. But one or two are.
I agree with Mosschops that Santander (and other Spanish big corps) are a play on Latin America – what scares me about that is Ms Kirchner’s sticky mitts. Mind you, around 2000 Spain ‘stole’ most of Argentina, so maybe there’s some justice in them taking back ‘their’ stuff. Hmmm, no, not a gamble I fancy personally.
Hmm, but isn’t it a bit easier to steal natural resources on some Nationalistic war cry then to seize an arm of a modern multinational bank?
The real trouble for me with the Spanish banks like Santander (which I agree seems attractive and tempting) is that most of its still roaring profits comes from overseas, especially Latin America (but also the likes of Portugal, fear fans), but the Spanish property exposure in its asset base could blow it up in a worst case scenario. It’s the old ‘sliver of equity’ problem that always bedevils banks in a crisis.
Hi from Spain! I’d like to add another idea to this analysis.
We have very recently had elections, which have resulted in a wide-majority goverment. This new government is showing some determination in the line of perking up public expenditure and tackling reforms.
In a short lapse of time taxes have been risen and several austerity measures taken. And yet the government maintains much of its support, as though people is convinced that this policy is hard but necessary.
I think this political stability with a strong goverment willing to make reforms and cut expenses adds a very positive factor to our present predicament.
>And cheapness tends to come hand-in-hand with fear and turmoil.
Yes, indeed. I think European markets will a) fall much, much further than they have done so far if/when Greece exits the Euro and b) these falls will be overdone. 2008/2009 may well return, but I am not so confident of the Grexit that I am going to sell up now.
Hi, I am one among the thousands of Spaniards invading your country in recent years – apologies- and, for full disclosure, I must admit that I, unlike you, hate Spain intensely, so my opinions may be biased.
And here is my feedback: I wouldn’t invest in Spain. There is a good reason the prices are at that level, and I was expecting this tumble during 2010 and 2011. I knew it was a matter of time, and it will be a matter of time that it get worse in the future. I am in no way apocalyptical, nor do I think there will be a “corralito” or the banking system will collapse. I don’t even think the euro will fall apart. It’s simpler than that.
I believe the future of the country is even gloomier than the average outside observer might think. Look at the population pyramid. Look at how much industry and research we have: none – stock market: banks, more banks and previously national companies (phone, commodities )-. A generation lost with unemployment. Now the recent tax raise. An immature mentality that idealises any left-wing politics to the point where a sizeable part of the young (and not so young) population define themselves as communists. I could go on…
But possibly, worst of all, a culture, a society, that slowly rots your soul, maybe not obvious to the occasional visitor. It’s not exactly hedonism, is a combination of indifference, arrogance, callousness, envy, greediness, sluggishness. It’s owners of business ripping their customers off to get exorbitant gross margins, politicians making the headlines everyday for corruption and getting reelected. People earning less than 1000 / month buying iphones, expensive clothes and going to bars on a regular basis.
There is no sign these problems will be fixed in there foreseeable future. So, no, I wouldn’t invest, not even at these prices.
@Diego — Thanks for sharing your first-hand experiences. Even though I do very much enjoy visiting the country etc, I do recognise some elements of what you’re saying, especially in discussion with friends, who are themselves exasperated with their own friends who for example bought brand new cars on credit with their first summer job. (This was a few years ago — probably not possible anymore?)
However I would note there’s a difference between investing in Spanish *companies* and investing in Spain. The most attractive of the former are big overseas operators. They also presumably have the pick of Spaniards with a bit of get-up-and-go about them! 😉
We’re hiring a fair few people from Spain and Greece, and a smaller number from Italy and France. There are plenty of bright young people there and it’s a shame that they’re having to seek work overseas.
Employers in Spain must be able to be very selective about who they hire, and what they pay them, which can only help in the medium to long term.
@The Investor – You are right about that last point. Some companies have as much as 3/4 sales and 90% profit overseas, mostly South America, eg OHL, CAF and some others
You should, however, be able to weather the occasional frights and look for the very long term due to the risks of nationalisations (Repsol in Argentina and REE in Bolivia very recently and Chavez who is no stranger to nationalisations either -so far just with his own people, afaik-)
I must take issue with Diego’s comments. Like him i invaded a foreign country but in my case it was the other way around. Whilst i would agree with some of his issues about the general state of Spanish business and would highlight the debt that many business leaders and ultra wealthy owe to the state, it is a sweeping generalisation that has little to do with investingt. There are jewels amongst the dross that do not reflect this model. Imditex, .Mango, Griffols, Amadeus, Acerinox , viscofan to name a few. Maybe these companies are not representative of Spain !ut that’s the point.