Five Charts Show Spanish Stock Pain Ahead of Key Catalan Speech

Spanish stocks have dropped since Catalonia’s referendum on Oct. 1 as the prospect of a unilateral declaration of independence and the risk of social unrest led investors to trim their exposure to the country. Catalan President Carles Puigdemont is due to address the regional legislature at 6 p.m with many of his supporters looking for him to announce a new republic.

Ahead of Puigdemont’s address, here are five charts that illustrate the struggle of the country’s equity market.

While European stocks have gained ground since the end of August, boosted by robust macroeconomic data and a retreat in the euro, Spain’s IBEX Index has underperformed, hit by worries about the Catalan crisis. The Spanish benchmark is still up 8.3 percent in 2017, after rising by as much as 20 percent to a peak reached in early May.

The damage has been most visible in companies with a strong exposure to the domestic economy. Food retailer DIA has tumbled 14 percent over the past four weeks, utility group Endesa SA is down 8.9 percent and Inmobiliaria Colonial SA has lost 9.1 percent. The Morgan Stanley Domestic Spain Index (MSREDOES) is down 4 percent over the period, in sharp contrast with a 5 percent rally in Germany’s DAX, which hit a record intraday high Monday.

In the stampede, investors pulled out more than $250 million last week from U.S.-listed exchange-traded funds tracking Spanish shares, the largest outflows in two years, even as most European countries had inflows. The iShares MSCI Spain Capped ETF saw its largest ever one-day redemption on Oct. 5.

With no contagion to other European stock markets, IBEX’s strong underperformance in the past few weeks means that Spanish stocks are now trading at their cheapest valuation levels relative to European stocks in more than a year. The IBEX trades at 13.3 times expected earnings in the next 12 months, versus 15.2 times for the Stoxx 600.

The selloff represents a buying opportunity, particularly on banking stocks, PineBridge Investments equity strategist Graeme Bencke said, citing Spain’s strong economic momentum. “We are viewing it short-term as a bit of an opportunity,’’ he said. “Unless you think this is going to create a significant change in sentiment in business investment then the banks should continue to do pretty well.”

Natixis strategists including Sylvain Goyon also see buying opportunities following the selloff, reaffirming Tuesday their call made last week to overweight the IBEX index, and betting on a potential outperformance of 8 percent when the benchmark starts to catch up.

The sharp pull-back in Spanish stocks is not justified, UBS Wealth Management strategists wrote in a note Monday, saying among other things that the bulk of revenues from big Spanish companies are generated outside the country.

According to a Morgan Stanley note published in June, companies listed on the IBEX index derive 74 percent of their revenues from abroad, and of all major equity indexes in Europe, the IBEX has the highest exposure to Latin America, contributing 20 percent of revenues.

— With assistance by Paul Jarvis, and Beth Mellor

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