Spanish Bulls Who Poured Cash Into ETF See Red After Votes

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Spanish Prime Minister Mariano Rajoy
Spanish Prime Minister Mariano Rajoy arrives for the Popular Party election rally in Madrid on May 22. Photographer: Denis Doyle/Getty Images

Investors showed little concern about Spain’s regional elections in the days leading up to them. They may be ruing it now.

The IBEX 35 Index plunged the most in more than a month in the past two days as political movements backed by anti-austerity party Podemos gathered strength from Barcelona to Madrid in the Sunday votes. Last week, the gauge rallied the most since March and traders added $30 million to an exchange-traded fund tracking the nation’s shares. The ETF hadn’t had outflows in more than two months.

Concern that Spain will follow Greece’s political path is back after Prime Minister Mariano Rajoy’s People’s Party suffered its worst result in a municipal balloting in 24 years. The outcome could presage bigger changes as a general election is due later this year, threatening the economic recovery that Rajoy managed to pull through with four years of austerity.

“Spain was a target for those wanting to play the European recovery story,” said Francois Savary, chief investment officer at Reyl & Cie. in Geneva. “If Podemos wins the national vote, then the case for Spanish equities will be completely over. It will mean different policies and a total reassessment of the country’s economic prospects. The recovery will be derailed.”

Spanish shares, up 9.4 percent this year through Tuesday, have been trailing European markets, partly because of the political overhang. The nervousness had briefly eased as opinion polls showed support for Podemos slipped in recent weeks, and the IBEX 35 climbed to a five-year high in April. It’s fallen 3.7 percent since then.

Syriza Ally

Investors fear that a potential victory for Podemos, the party allied with Greece’s Syriza, will bring months of chaos in Spain, the European Union country with the biggest budget deficit after Cyprus. Athens’ ASE Index has lost 21 percent since Dec. 8, the day before former Prime Minister Antonis Samaras said his government would start the process of electing a new president early, opening the door for Syriza’s ascent.

On Tuesday, as some European markets reopened following a holiday, hedging costs for the Euro Stoxx 50 Index surged the most in almost six weeks.

Julius Baer Group Ltd.’s Christoph Riniker is among those sticking with Spanish stocks as growth picks up in Europe. Forecasts show Spain’s economy will expand 2.7 percent this year, up from a January projection for 1.8 percent. That’s almost twice the pace of the euro area and compares with growth of just 0.5 percent for Greece.

Earnings Improvements

“Drivers like the macro picture, ongoing quantitative easing or substantial earnings improvements support this view,” Riniker, the head of strategy research at Julius Baer in Zurich, wrote in an e-mail on Tuesday. He recommends being overweight on Spanish and Italian equities. “We now prefer investments with a domestic exposure over export-oriented stocks.”

Rajoy will struggle to win the national vote, exacerbating worries for stock investors just as valuations are starting to look high, according to Reyl’s Savary. The IBEX 35 trades at 16.4 times the estimated earnings of its members, compared with 15.6 for the Euro Stoxx 50.

“The economic results of the current government are actually very good,” Savary said. “But this trade has been played now, valuations are no longer as attractive, and the country faces a period of uncertainty.”

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