Spanish Traders Still Waiting for New Government Flee Stocks

  • Equity volatility surges before March 2 vote in lower chamber
  • Political uncertainty may continue, potential election in June

In a year marked by a surge in volatility across markets, investors in Spanish stocks have suffered more than others.

Along with worries about global growth and the efficacy of central-bank stimulus, those invested in Spain have to contend with prolonged political turmoil, with no government in place and a confidence vote next week. Swings in the benchmark IBEX 35 Index have reached their highest levels since 2012 and are at a one-year peak relative to the regional Euro Stoxx 50 Index. 

Spain spent most of last year going though regional elections and finally an inconclusive general vote in December. That’s led to investors fleeing the market, with the nation’s stocks losing almost a third of their value since their April peak and becoming the worst performers among major European peers. Should the country’s parliament fail to pick a prime minister by May 2, a new ballot will be held, meaning more months of limbo.

“The most worrying is that there is no clarity at all on what the new government is going to look like or when there will be an answer to that,” said Francisco Salvador, a strategist at FGA/MG Valores. “Investors have to factor in high political uncertainty on top all the other concerns hitting Europe right now. We are recommending our clients to diversify and add more European exposure or cash.”

The Socialists signed an agreement with the liberal Ciudadanos on Wednesday, seeking to form a coalition to oust Acting Prime Minister Mariano Rajoy’s People’s Party. Still, the two don’t have enough lawmakers on their own to win a confidence vote in the lower chamber on March 2 and are trying to get support from other parties.

The IBEX 35 climbed 1.8 percent at 9:39 a.m. in Madrid after its worst two-day drop since earlier this month.

This year has been brutal for stocks worldwide, and more so in Europe. A deepening oil rout, growing concern over a slowdown in emerging markets and domestic economic reports that started missing forecasts all added up to send Euro Stoxx 50 volatility up 43 percent in 2016, according to a gauge tracking moves in the past 30 days. Swings in the IBEX 35 have surged 72 percent.

Another reason Spain has been particularly hit is that some of its largest companies are especially vulnerable to a slowdown in developing nations. Banco Santander SA and Telefonica SA, two of the biggest components of the IBEX 35, get more than 40 percent of their revenue from Latin America.

While the declines have lowered the index’s valuation to 11.9 times estimated earnings -- near a two-year low relative to euro-area stocks -- investors aren’t betting on a rebound yet. The iShares MSCI Spain Capped ETF hasn’t had any inflows since December. So far, the $929 million exchange-traded fund has bled almost $220 million in 2016, including the biggest outflows in more than a year in January.

The political uncertainty will keep stoking volatility and reducing investments until resolved, according to Alberto Espelosin, who manages an $88.5 million equity fund at Abante Asesores Gestion in Madrid.

“Volatility in the Spanish market is mainly due to the slowdown in Latin America, with weaker south American currencies hitting banks especially, and political risk, which is harder to quantify,” Espelosin said. “The concern is that depending of one type of government or another, taxes might be raised, and/or regulation increased.”

Before it's here, it's on the Bloomberg Terminal.