Take 5 and come back tomorrow

First of all, let’s be clear. The following is not investment research/advice. And, as such, it involves no investment recommendations. These are my thoughts on Spanish equity issues, which I find relevant. I share them freely (and not just as regards price). As always, I am only trying to help. Please read the rest of the “discomplainer (*)” at the end of the article.

Market environment: A hawk scares the bulls - (Asia-Pacific markets declined with futures for Europe and the US pointing down) – Asia-Pacific markets declined on a perceived hawkish monetary policy stance by the Fed (see below) and fears regarding growth and earnings. Futures for Europe and the US point down.

Response to the Covid-19 crisis: When the tide runs out, we will see who was swimming naked - (Judges demand that municipalities return the economic activity tax charged during Covid lockdowns/The Government will end in July the moratorium on bankruptcy declarations) – Judges starting to rule that municipalities have to return the economic activity tax charged during Covid lockdowns makes sense (no activity, no tax). This would seem to point to acceptance of government responsibility for loss of income, which is not an ideal precedent for the Government ahead of decisions on the lawsuits brought for compensation in relation to Covid restrictions (see below Aena/IAG). Part of the normalisation process after Covid will be the elimination of the moratorium on voluntary bankruptcy declarations. This should improve visibility of the impact of the pandemic, even if the resulting sight may turn out to be unpleasant.

Monetary policy: Fed up - (The Fed will raise rates in March in order to slow inflation) – To be fair, the Fed is in an impossible position with respect to its aim to control inflation without damaging economic growth/labour market. Either inflation is supply driven, which the Fed is powerless to control, or it is demand driven, in which case the same forces that are pushing up prices are propping up the economy/labour market and controlling inflation will necessarily mean cooling both. This is why the comment, at the press conference, regarding there being a lot of room to raise rates before impacting the economy/labour market would seem to imply that the Fed aims to “look busy” with relatively harmless rate rises, in hopes that inflation will correct by itself, allowing the Fed to claim credit (a more negative view would seem to be implied by the steepening of the curve, pointing to the Fed misjudging the rate rises that the economy can absorb). Importantly for markets, the Fed also seemed to play down QT, saying that no decision had been taken on when it would start or at what pace (although the goal is basically to not reinvest maturing bonds, letting them run off the balance sheet), and that QT would be playing in the background while interest rate rises would be the main instrument (basically admitting that it does not really know the impact that QT would have). In this respect, the market seems to have misunderstood talk of moving faster in balance sheet reduction as implying an actual sale of bonds, rather than just no reinvestment, instead of just moving faster from QE to QT than in the last crisis (which is not difficult given that last time it took it 10 years). I don’t think the Fed was significantly hawkish, especially relative to expectations, but that does not seem to be the way the market is taking it.

Aena/IAG: Own goal - (Aena will appeal the Government’s decision to deny it compensation for the loss of traffic caused by Covid) – The decision to reject Aena’s request for compensation for lost traffic due to the pandemic is more complicated than decisions regarding hostelry operators (see above – Response to the Covid-19 crisis), as the airports were not locked-down by government decision, and the compensation would not ultimately be paid by the Government but by the airlines (and subsequently, largely by the public). However, it seems surprising to state that the pandemic did not represent a cause for review of tariffs, which requires an “unforeseen event that had a quantifiable and substantial impact on the financial viability of the airport network”, especially as the law talks about “declines of more than 10% caused by natural disasters, terrorist acts or wars”. Aena’s loss is IAG’s gain. Given that the Government owns 51% of Aena this is something of an own goal.

Macro: Citius, Altius, Fortius (for inflation) - (The Funcas panel calls for GDP growth in Spain of 5.6% in 2022 after 4.9% in 2021, both a 0.1pp downward revision from its November forecasts, as well as raising its forecast for 2022 average inflation by 1.1pp to 3.5% after 4.5% in 2021) – The downward review of forecasts for GDP growth is not very significant, especially compared to that of other institutions, although it should be pointed out that the consensus panel had already adjusted earlier. The rise in inflation forecasts is more significant as it seems to point to a situation where wage growth pressures could intensify.

*The above information has been read/understood/summarised/evaluated/copied as well as I could to provide a guide to Spanish equities, given available timing/intellectual constraints, and I accept no liability for misreading and/or mistranslating the original copy as set out in my previous article (which I urge you to check, as I am only trying to point you in the right direction, I hope). As for what you may decide to do, after reading the above, please contact your legally approved provider of investment advice on Spanish equities.