Is Spain at an optimal time to invest? The Ibex 35 is one of the indices that has stood out the most in Europe. The national selective has risen 24.4% from the most recent lows and almost 4% in the last 12 months. This invites one to consider whether the “best” has already passed and how to position oneself in Spanish territory from the point of view of investment.
In this sense, the context would invite “prudence”, according to experts from Freedom Finance. For now, the IMF estimates that the country will grow by 1.2%, compared to the OECD, which estimates that the economy will expand by 1%, with an interannual rate of inflation that will be at historically high levels, above the target 2% of central banks. “This is a slowdown in activity, after the rebound in 2022, derived from the recovery from Covid,” they say.
The adverse situation in the energy sector and the war in Ukraine have clouded the favorable climate in the investment scheme. Sentiment indicators are at their lowest since 2008 and it is difficult to see the appeal of the current moment. However, positioning yourself for the future, with a long-term framework, can favor solid performance.
One of the main catalysts for thinking about a more uncertain market climate has to do with monetary tightening by the European Central Bank (ECB). “It has made the fastest rate rise in history, and that can have a direct impact on demand in a domestic economy like the Spanish one, especially due to the burden of variable-rate mortgages,” they comment from Freedom Finance Europe.
Interest rates in Europe stand at 2%, while the consensus estimates that they will be above 3% to achieve the goal of curbing strong inflation. As inflationary pressure and the threat of higher rates begin to fade, equity valuations and multiples will benefit. The easing of financial conditions will improve investor sentiment and, in turn, will widen PER (price-earnings) ratios.
It makes sense to build a balanced portfolio that includes cyclical, growth and defensive sector ETFs
In mid-2023, earnings and sales expectations will be revised downward, and markets will begin to look to 2024 and the recovery from the cyclical slowdown. This could offer opportunities to add cyclical and growth names. Thinking in Spain, the story could be quite clear: investors must use a general selective strategy and not forget about diversification.
“Therefore, it makes sense to build a balanced portfolio that includes cyclical, growth and defensive sector ETFs, as well as bonds,” the Freedom Broker team explains. Such a portfolio becomes more relevant during periods of increased volatility, especially for investors who have a low tolerance for risk and are primarily concerned with a lack of capital.
Leading sectors in Spain
The maximum realized real rates represent a turning point in the markets. To do this, the Federal Reserve will have to interrupt its cycle of raising interest rates as inflation slows and unemployment rises. In terms of specific names, some sectors are worth considering, according to experts, to add to portfolios, taking into account the current climate.
One of them could be the IPO or IPO segment. Many companies have stopped their intention to make the leap to the stock market as a result of the uncertainties, but perhaps it can be reactivated at some point in 2023 when the clouds begin to pass. “In the renewable energy sector in Spain, there are still many companies saving to take that step,” they point out.
Also, the possibility of focusing on cyclical sectors could be observed. The energy sector, led in Spain by companies such as Repsol, Iberdrola, Enagás or Naturgy, in historical terms has had an increase in cash flows at times when there has been high inflation. “In addition, energy prices and consumption could continue to be favorable elements,” they add from Freedom Broker. Prudence and independent analysis must be the main tool.
On the other hand, the financial sector, which has a large favorable exposure to interest rate increases by the European Central Bank, would be another sector in which the Spanish investor could work. “Entities such as Santander, BBVA or Caixabank, have the possibility of increasing their profitability in this scenario”, they expose from Freedom Broker. As a protective sector could be the health sector, since it has historically low valuations, protective qualities and long-term demographic trends, according to the aforementioned firm.
“Investors should use a general selective strategy and not forget about diversification. Therefore, it makes sense to build a balanced portfolio that includes cyclical, growth and defensive sector ETFs, as well as bonds. Said portfolio becomes more relevant during periods of increasing volatility, especially for investors who have a low tolerance for risk and are mainly concerned with the availability of capital”, conclude these experts.
The possibility of fixed income
On the other hand, investors may also consider looking towards government bonds. As the experts from Freedom Finance Europe indicate, after the wave of sales within this asset class, “the light at the end of the tunnel could already be seen”. Therefore, it could be a good time to consider betting “for the bonuses”. “In Spain, 12-month Treasury bills are already being issued at a coupon of 3%, which is an interesting percentage of return, taking into account the point at which we started… It may be a good alternative to minimize risk of the investors’ portfolio”, they conclude.