Spanish Stocks Reverse Post-Election Gain as Europe Rout Worsens

Rajoy Wins Spanish Election Amid Brexit Chaos

Spanish stocks erased an advance as optimism spurred by an election win for Acting Prime Minister Mariano Rajoy dissipated in the face of broader market turmoil wrought by the U.K.’s vote to leave the European Union.

Most lenders followed regional peers lower, while IAG SA tumbled on concern travel demand will drop after the Brexit vote. Bankia SA bucked the trend to climb 6.9 percent as analysts favored domestic banks after the election. Utilities also gained.

The benchmark IBEX 35 Index lost 1.8 percent at the close of trading in Madrid, after a record plunge on Friday. It rose as much as 3.4 percent after Rajoy won the general election with a bigger margin than in December, while anti-establishment group Podemos failed to add more seats as forecast by polls in the run-up to the vote. As concern about Europe’s political and economic outlook post-Brexit engulfed the region’s shares, Spanish equities followed.

“The rest of Europe is falling again because of Brexit, and even though we have positive news, the IBEX 35 is falling with it,” said Carlos Ortega, a Madrid-based trader at Beka Finance Sociedad de Valores SA. “Still, the election results were good because the extremes got fewer votes than expected so Spanish stocks should start performing in line with the rest of Europe because we don’t have the concern of a populist government weighing on investors.”

Spanish shares were hammered after December’s inconclusive vote, with a selloff deepening at the start of the year. With an 18 percent annual slide through Friday, the IBEX 35 is one of the world’s worst-performing equity markets. Today’s declines are in keeping with the typical move for Spanish equities after a vote -- they have never risen in the immediate aftermath of a general election in data going back two decades.

Still, the IBEX is down less than the 4.1 percent drop in the Stoxx Europe 600 Index, reflecting improved sentiment after Rajoy’s People’s Party won 137 seats in the 350-strong Spanish chamber. That’s more than in December, but still short of a majority. The socialist party held on to its position as the second-biggest party. Rajoy said he’ll start talks with other groups today. Pro-market party Ciudadanos is the most natural ally, though it lost eight seats from December, leaving the combined strength seven short of a majority.

After lagging regional peers last year, Spanish shares continued their descent in 2016 amid political turmoil at home, while investors also had to contend with concerns over the efficacy of central-bank stimulus and slowing growth in emerging markets. The worries intensified on Friday, when Britain’s referendum results showed voters favored leaving the European Union, raising questions about the trading bloc’s future.

Even as Spain’s economy is forecast to grow 2.8 percent this year -- more than major peers in the euro area -- investors have remained skittish about its stocks. The IBEX 35’s valuation of about 12 times estimated earnings is lower than the multiple of 13.5 for the Stoxx Europe 600 Index. The price gap between the IBEX 35 and the DAX Index of Germany, the biggest nation in the region, has been widening.

As Spanish stocks fell, investors shunned them. The iShares MSCI Spain Capped ETF has had outflows every month since September. Lenders have suffered the most this year, with Banco Popular Espanol SA, Bankia SA and CaixaBank SA slumping more than 40 percent through Friday.

Utilities outperformed, with Endesa SA, Red Electrica Corporacion SA and Gas Natural SDG SA gaining. UBS Group AG said in a June 17 report utilities risk the biggest losses if the socialists and Podemos formed a coalition.

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