By Léon Cornelissen, chief economist, Robeco
Spain is in recovery mode, but has not been rewarded for this by equity and bond investors so far in 2015. What is the outlook for the rest of the year? Robeco’s Chief Economist Léon Cornelissen explains why he is optimistic.
“The Spanish economy is doing fine and there is a strong cyclical recovery underway.” That is how Cornelissen sums up the current state of the fourth-largest economy in the eurozone. The country is emerging from a difficult period as a result of the global financial crisis. Economic growth was 1.4% in 2014, but this year it is expected to be more than 3%.
Despite the positive growth figure for 2015, the Spanish stock market is lagging: The IBEX 35 Index has risen 7% this year, while the Euro Stoxx 50 Index is up 11% (as of 5 June 2015). “Economic difficulties in Latin America are a problem for Spanish equities,” explains Cornelissen. “And investors, who already expected a strong economic recovery last year, have now become more cautious.”
“Second, the outlook for corporate earnings will strengthen as the economy improves further,” he continues. “Financials, which represent the biggest component in the IBEX 35 Index, are geared to see an earnings improvement. And the banks have successfully recapitalized by issuing new shares. Moreover, Spanish house prices have risen again, which is very important for mortgage loans.”
Debt levels improve
The recovery will lead to improved public finance figures, says Cornelissen. “The figures are not great; a 4.5% government deficit is still too high, as is the current debt-to-GDP ratio of just under 100%. But the direction is positive and the government expects these figures to come down. I agree with the government, given the strong economic recovery. The deficit is expected to go down to the 3% threshold set by the Stability and Growth Pact of the EU.”
Another important factor behind this Spanish renaissance is the country’s increased competitiveness, says Cornelissen. “Spanish exports are doing well. Unit labor costs have come down, which enables companies to lower their costs. This has been helped by labor market reforms, especially a decentralization of wage negotiations. Currently Spain has the strongest growth within the eurozone.”