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Magazine Issues » December-January 2016

COUNTRY REPORT: Did anyone expect the Spanish invigoration?

After years of recession, rising prices, inflation and record unemployment, the funds industry in Spain appears to be on the up again, writes Kit Klarenberg. 

Spain was badly wounded by the financial crisis of 2007/08. According to Morningstar data, the equity market in Spain stood at around €8.8 billion in 2007. By 2010, this had almost halved due to outflows of €4 billion. If market impact depreciation is taken into account, the market bottomed at €2.2 billion in early 2009. 

Fears of a Eurozone exit kept investors away until 2012, when European Central Bank president Mario Draghi pledged to “do whatever it takes” to save Spain. 

“It started to pick up, but investors were still cautious,” says Javier Sáenz de Cenzano, Morningstar’s director of research for Spain. “It wasn´t until market returns recovered strongly that investors came
back at full power.” 

Moving forward

Now that the country seems to be steadily recovering, figures from national investment association Inverco show total assets under management of €222.1 billion as of November 31, a figure unseen since February 2008. 

This represents a €1.8 billion increase on October’s total; overall, Spanish funds have attracted total net inflows of
€27.3 billion during 2015, a rise of 14% on 2014.

Spanish equities have increasingly become an area of interest for investors, with equity funds taking €498 million in November. After two years of significant inflows into fixed income funds in Spain, in 2015 the trend has reversed and investors are pulling material amounts out.

“Even though flows have been positive in equity funds in the last two years, investors remain underinvested – the vast majority of the money has gone to allocation funds, particularly the ‘cautious’ variety,” says Cenzano.

Mixed fixed income funds received inflows of €486 million in November, and have grown in size by 85% since the start of 2015. Other areas are attracting positive net revenues too, such as pure fixed income (€446 million) mixed equity (€432 million) and guaranteed funds (€421 million). Cenzano explains low interest rates have proven a strong tailwind for funds in Europe, as European investors have moved to capitalise on their tax benefits. 

Market opportunities

The Spanish equity market is highly concentrated, with large stocks such as BBVA, Inditex, Santander and Telefónica dominating the index. However, 

Cenzano notes equity investors are increasingly turning away from such mega-caps. “In the last three years, small and mid-caps have significantly outperformed their large cap counterparts, and this is also the case this year to date,” he says.

Tim Stevenson, manager of the Henderson Horizon Pan European Equity fund, views the rehabilitation of the Spanish investment market in the context of an ongoing European upturn.

“This trend reflects the recovery in corporate earnings in Europe – most companies are looking to be in line with estimates this year, helped by QE [quantitative easing] as well as the currency advantage provided by a weaker euro,” he says.

“Anti-austerity movements in Greece and Spain seem to have lost momentum, suggesting radical protect parties will not necessarily thrive elsewhere. Centre-oriented economic policies look set to dominate for a few more years.”

Laurent Millet, co-manager of the Artemis European Opportunities fund, sees opportunities in Italy. It has endured a triple-dip recession, but remains the world’s eighth-largest economy and the eurozone’s third. 

“Matteo Renzi’s government has proven itself to be financially responsible and instigated a number of reforms,” he says.

While GDP advances will be modest in the short term (the economy is expected to grow by 0.6% this year), the European Commission has upgraded its forecast for next year to 1.4%.

Furthermore, the protracted downturn (before the first quarter of 2015, Italy’s economy had not grown since the second quarter of 2011) has resulted in stocks trading at a significant discount to their book value – 20%-30% in some cases. Maybe it’s time for a renaissance. fe