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: Nothing is Evergrande forever - (Asia-Pacific markets declined with European futures mildly up and those for the US largely unchanged) – Asia-Pacific markets declined led by China on increasing loss of confidence regarding potential government rescue packages and the liquidation order for Evergrande. Given high US market concentration in a few stocks, investors are nervous ahead of the earnings season. European futures were slightly up and those for the US flat.

Response to the crisis: Trying to make everyone happy - (Spain slows down the pace of execution of EU funds being overtaken by Italy and Portugal (Expansion p26) – Spain being behind the curve in receiving/spending EU funds is not positive, but partly understandable given the political turmoil of 2023 (regional/local and national elections). This has partly led to a delay in processing investment projects that would receive the funds, especially given the politically discretionary method chosen for their awarding. Going forward it is difficult to see an improvement given the unwieldy nature of the Government, as it is a coalition of parties who do not always see eye to eye and depend on parliamentary support from regional parties with different and sometimes clashing priorities. This may continue to have a depressing effect on economic growth.

ACS: Now you see it, and now you don’t - (The Supreme Court rules against the Abertis claim from the Government ofnbsp; €4bn in relation to the AP-7 motorway (Expansion p3) – The origin of the dispute between Abertis (c. 45% direct/indirectly owned by ACS) and the Government relates to the agreement whereby Abertis invested in expanding the AP-7 motorway in return for an extension of the motorway and a mechanism by which the Government would compensate Abertis for any shortfalls in traffic relative to the historic series. Traffic was substantially below the benchmark level through the end of the concession, leading to a lawsuit that ended in the Supreme Court. The difference between the amount claimed by Abertis and that offered by the Government amounted to more than €4bn, with c.€1.9bn corresponding to ACS due to its direct and indirect stake, equating to c. 17.6% of market cap. Given that the share price “only” fell 9.9% it would seem that collection in full was “only” c. 56% discounted. I have not read the sentence but the media claims that the court says there was no such clause (which sounds strange as Abertis had lower courts agree with it) and that even if there were it would run contrary to the spirit of concession contracts that do not allow transfer of traffic risk. This last point is also strange given that there are plenty of motorways in which the traffic risk is borne by the granting authority with the motorway only committing to the “availability” of the asset. Obviously bad news.

Banks: What goes up must come down - (The EBA believes that revenue for the banks will start to decline and credit quality to worsen as a result of the rise in rates (Expansion p18) – The rise in rates should lead to lower NII (due to higher cost of deposits and greater dependence on market financing), lower lending growth and higher provisions due to worsening credit quality. Yesterday the EBA said that the tax on banks had been introduced at the right time, by which we believe he means the sweet spot where NII was rising due to higher rates leading to a greater yield on loans without a worsening of credit quality taking place. The combination of both statements makes sense only if the tax is withdrawn as banks start to face more challenges. I don’t think the tax will be withdrawn.

Hotels: Will you love me tomorrow - (Raise prices 22% since Covid, which together with improvements in occupancy lead to breaking €100 in RevPAR in 2023 (Expansion p5) – Average room prices reached €145.5 in 2023 +8.3% YoY and +22% on 2019. Prices are expected to continue rising in 2024 although at a slower pace. This together with occupancy improvements (with further potential in urban destinations) has led to breaking the €100 RevPAR barrier at €105. The increase in occupancy in 2023 despite the price increases highlights the strength of demand. The main question is how long this will last, once 2019 levels have been significantly exceeded in prices (partly reflecting cost inflation) and occupancy is not far off from that of the same year. There clearly was pent up demand and significant household savings. This may not be true going forward.

*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.