Spain is a favorite among investors, as are banks, Inditex Power Ibex Rally – BNN Bloomberg

(Bloomberg) — Spanish assets have become investor darlings, a sure sign that the country is finally emerging from the trauma of its sovereign debt crisis more than a decade ago.

Despite Tuesday’s correction, Spanish stocks have outperformed other major European markets this year, with banks leading the way thanks to a resilient economy. And it’s not just about stocks: investors are sinking into the country’s debt. For the first time since 2007, French bonds were considered riskier than those of its southern neighbor.

Ibex 35 grew 16% in 2024, outperforming other major European markets. The index is at its highest level in almost 15 years and is on track for its best two-year growth since its 2004-2006 heyday. Banks may have led the charge, but its force is broader, helped by earnings estimates that are growing faster than anywhere else in Europe.

“Spanish shares are benefiting from a number of favorable tailwinds, such as good progress in macro conditions, driven by tourism and spending,” said Francisco Quintana, head of investment strategy at ING Spain. “They offer high dividends and even cheaper valuations in an already cheap European market.”

These skyrocketing earnings estimates mean stock valuations continue to be relatively well monitored. Ibex is trading at a forward price-to-earnings ratio of just above 11, close to its historical average. That’s a steep discount of almost 20% to the regional benchmark Stoxx 600.

Overall, the economy is doing well. Record tourism and strong exports have resulted in one of the fastest growth rates in Europe, while unemployment is near its lowest level in around 17 years.

This is all a far cry from 2012, when Spain asked the European Union for 41 billion euros ($45 billion) to support its lenders. Mounting losses in the real estate market undermined confidence in the country’s government bonds.

Gross domestic product will grow by 2.7% in 2024, compared with the previous forecast of 2.4%, the government said earlier this month. Compare this to a weak 0.7% across the wider euro zone, while Germany expects no growth at all this year.

Spanish banks, which make up almost a third of the Ibex 35, have benefited from economic resilience. Interest rates remain high enough even as the European Central Bank begins its monetary easing cycle, which supports its core business of lending.

In addition to banks, Inditex SA and tourism-related companies such as airport manager Aena SME SA and airline operator IAG SA played major roles in the rally. Zara’s ownership has jumped 33% this year, helped by rising sales. Inditex itself provided 30% of Ibex’s profits. Clean energy provider Iberdrola SA can borrow a 21% down payment.

So what can go wrong? A potential obstacle could be high dependence on banks at a time when the ECB is increasing interest rate cuts and Inditex will not be able to maintain its meteoric sales growth next year.

Morgan Stanley analysts have just downgraded the banks to “in-line” from attractive, noting that Spanish lenders’ sensitivity to changes in interest rates is understated compared to their European counterparts. Still, Spain’s benchmark equity index also has a significant 19% weighting in utilities, which directly benefit from lower rates as a bond proxy.

The appetite for Spanish assets was evident in the latest survey of Bank of America Corp. fund managers, in which the country was second only to Britain in terms of stock market preferences. Unlike Italy, France and Germany, fund managers went from underweight in Spain in August to overweight in September.

However, based on analyst price targets compiled by Bloomberg, the Ibex 35 is expected to rise 10% over the next 12 months, slightly lagging the Stoxx 600’s expected 12% gain.

“There is too much optimism because it will be difficult to repeat the excellent last 12 months,” said Quintana of ING. “Yes, Spanish shares will still be in positive territory, but the gains will be more modest.”