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: China, again - (Asia-Pacific markets declined with European futures mildly up and those for the US flat) – Asia-Pacific markets declined due to evidence of some weak areas in the Chinese economy and fears of further tightening by the Fed. Futures for Europe were mildly up and those for the US flat.

Response to the crisis: Location, location, location - (Only 7,000 homes owned by the Sareb bad bank are located in provincial cities (Expansion p26) – The most recent promise by the Government aimed at easing tensions in the rental housing market was to mobilise 50,000 homes owned by Sareb for low rent housing. One of the problems, as I already pointed out, is that the homes might not be fit for purpose, as the Sareb has by now sold everything that could be sold. The additional problem, as noted above, is that only 15% of the Sareb homes are located in the provincial capitals, where most of the “zones under rental pressure” are situated. As the saying goes, the three most important things in real estate are location, location and location.

Banks: Living a life of excess - (According to the Spanish banking association (AEB), Spanish banks have €60bn excess capital, covering their cost of capital for the first time since the 2008 crisis (Expansion p18) – Banks having excess capital is better than the alternative. But the key is “excess” relative to what? Current regulatory capital requirements are designed to be beaten (no bank wants to have less or in line capital), with the real “regulatory capital” being that which triggers limits to dividends, or calls for higher provisions, by the central banks.

Hotels: Every silver lining has a cloud - (Tourism sector profitability is negatively impacted by the rise in costs and the decline in average stay (Cinco Dias p6) – As I have repeatedly pointed out, the sharp rise in hotel pricing/revenues may not coincide with a parallel rise in profits, given that a large part of the rise in pricing is due to the pass through of higher costs. Fortunately, so far consumers seem to have accepted the higher prices, but there are doubts regarding how much longer this may be the case, should loss of consumer purchasing power continue.

Real Estate: The cat is out of the bag - (The house rental market sees a decline in supply (-5% in the last year) with record prices (+8%), while the new Housing Law is likely to further restrict supply and boost prices (Expansion p24-25) – The house rental market was already under pressure before approval of the new law, as the uncertainty created by talk of restrictions being applied probably dissuaded some owners from putting their assets in the rental market. Unfortunately, once the uncertainty is in play it may prove difficult to get rid of, as even if the current government were to be replaced by a more rental-friendly one, there would be the risk that the “peace” would only last 4 years (until the next elections).

*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.