View from Madrid: what now for Spain?

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After a summer where things were starting to look up for the eurozone, the Spanish economy’s precarious position has now caused tensions to rise and a potential ECB bailout is on the cards.

I was in the Spanish capital recently as its police force prepared to deal with further protests from the country’s increasingly frustrated population.

Spaniards have repeatedly taken to the streets to demonstrate against the government’s austerity measures and over the last few weeks the city has witnessed large-scale protests which at times turned violent as some small groups clashed with police.

The protests were directed at recent government spending cuts, tax hikes and the country’s alarmingly high unemployment rate which has breached the 25% mark.

The investors’ response

During our recent fund selector forum in Madrid, Citywire Global’s guest speakers were two of Spain’s leading fund managers, Iván Martín, former head of equities at Aviva Gestión, and Fernando Bernad, Citywire AA-rated equity manager at Bestinver.

I took the opportunity to speak to them for an insider’s view of the current environment in Spain and how it was affecting their investment approach.

As the full extent of the Spanish government’s emergency measures comes to light, the population’s income is being badly hit but Martín believes his government should also be focusing on some other cost-cutting programmes in order to reduce the country’s debt levels.

‘The problem is with the expenses of the government and it should attack these measures not just the revenue because the Spanish population and its corporates are very sensitive to these issues,’ said Martín.

The Spanish market is looking bleaker than before and solid, well run companies appear thin on the ground. Bestinver’s Bernad says his approach to the Spanish and Iberian market has changed little since the crisis with his focus remaining firmly on exporting companies.

‘Our exposure to the domestic economy and especially to the businesses that are more linked to the business cycle is still limited,’ said Bernad.

Opportunities

On the other hand, his counterpart Martín said that the crisis has also generated some good opportunities which he is currently taking advantage of in sectors like utilities.

‘We have seen a strong sell-off of these kinds of companies, like Iberdrola and Gaz Natural, and they are trading at very low levels because of government taxes on revenue. So it generates some good opportunities.’

The road to recovery will be a long arduous one and Bernad believes the key to safeguarding Spain’s economic future is to cut its debt and lay the foundations for growth.

‘The country needs to cut public spending and deregulate as much as possible. It should liberalise sectors and eventually cut taxes to improve the economic outlook.’

The topic of a potential ECB bailout was also on many people’s minds as Spain is now in line to join the ranks of Ireland, Portugal and Greece in the list of countries that have received aid.

Selectors’ views on the bailout

At our latest event in Madrid, fund selectors were split over how crucial an ECB bailout is for Spain’s economy.

Of those questioned, 40% said the country was doomed without seeking outside aid while 47% believed Spain does not require a bailout but raised the caveat that the crisis will drag on for longer.

The remaining voters (13%) believed the current measures being undertaken by Prime Minister Mariano Rajoy are enough to steer Spain out of trouble.

In Martín’s opinion, the question over whether or not Spain requires a bailout does not change the situation at hand. ‘We probably do need a bailout, but right now this is pretty irrelevant.'

'Whether we have a bailout or not, the austerity measures the government is introducing are mandatory to the economy to allow Spain to come out of this current crisis.’

This article originally appeared in the November edition of Citywire Global magazine.