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: Banking on China - (Asia-Pacific markets fell with European and US futures) – Asia-Pacific markets fell on concerns over Chinese growth and US banks. Futures for Europe and the US were down.

Response to the crisis: A shot in the foot - (The ECB pressures the Government to do away “soon” with aid against inflation (Vozpopuli) – A generalised reaction by European governments to rising prices was to introduce all types of subsidies. This helped consumers deal with the higher prices and also benefited the official inflation figures. Unfortunately, this also introduces strains in public finances. It is logical for the ECB to call for the withdrawal of the subsidies, especially as inflation has softened recently. But the problem is that eliminating the subsidies is likely to lead to a rise in inflation, especially if done at a time when raw material prices seem to be on the rise again and the base effect is less favourable. From the point of view of the ECB being able to claim victory over inflation this seems like a shot in the foot (although a commendable one).

Real Estate: When in doubt…freeze - (Funds free large transactions in Spain until 2024 due to political paralysis (Vozpopuli) – Part of the uncertainty regarding the Real Estate sector were clarified with the regional/local elections in May, as this is the level of the administration that has the most direct impact on the sector, but the central government and, more importantly, the parliamentary majority backing it, also count. On this basis, it should not surprise that the uncertain situation derived from the July general election should lead to a freezing of large investment decisions.

Regional financing: Misallocation of resources - (Madrid contributes three times a much as Catalonia to regional financing (Cinco Dias p22) – Given that the formation of a new government largely depends on the decisions of regional parties, the issue of regional financing is likely to be very much in focus in the next weeks. As I have already stated, the problem is that the reform of the system is not likely to rest on objective factors but on the need to please potential backers of the new government. This means ignoring the fact that Madrid is the largest contributor to the regional finance balancing fund, and potentially providing even better financing to Catalonia, which is where most of the swing votes reside. From an overall situation this might seem like a zero-sum game, but political misallocation of resources seldom ends well.

Reforms: Showtime - (The new government will have to present six new reforms to the EC (El Economista p23) – 2023 has been so far an electoral year, and it is logical that the EC put on hold delivery on the necessary reforms until the formation of a new government. But once a new government is formed, pressure to execute some reforms (debt sustainability, tax efficiency, productivity, financial asset quality, housing and public administration among others) is likely to increase. I don’t have high hopes of significant progress, as the new government is likely to be beholden to special interests that may often be contradictory.

*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.