"We are facing a bullish cycle"December 17, 2013
BBVA Corporate & Investment Banking market forecasts
- BBVA Corporate & Investment Banking's research department sees renewed investor interest in Spain
- The market is pricing in further narrowing of the Spain-Germany spread, which could move below 200 basis points
- BBVA's experts expect a long-term bullish cycle in the Spanish market with upside of up to 40% over the next two to three years
According to its annual strategy report for institutional clients, BBVA Corporate & Investment Banking's Global Markets Research department believes Spain remains attractive to investors. The market is anticipating a change in the economic cycle, meaning there will be investment opportunities both in fixed income as well as in equities.
According to analysts at BBVA Corporate & Investment Banking (CIB), Spain is attractive to global investors. This upbeat message is evidenced in the sharp narrowing of margins, both for sovereign bonds and corporate risks, as well as the notable upside offered by the IBEX35.
Antonio Pulido, Director of BBVA Global Markets Research, notes that "the market fully understands that we are at the end of the euro crisis and that Spain is implementing the necessary reforms to correct its structural imbalances. We expect investors to move towards a new phase and start to factor in a potential change in the economic and earnings trends".
This change is underpinned by increased corporate competitiveness, the commitment to fiscal consolidation and the revamping of the financial system. Under these conditions, SMEs' access to financing could improve as banks will be more prepared to offer loans and companies will be able to tap the capital markets via the emerging high yield market. Key to this is central banks maintaining their lax monetary policies and high liquidity levels.
Spanish fixed income still attractive
BBVA Global Markets Research expects the Spain-Germany 10Y spread to narrow further while the market begins to assume an improvement in the economic cycle which would result in a reduction in public deficit. Antonio Pulido believes the spread "could move below the 200 basis points barrier as investor appetite for Spanish risk remains high, as evidenced by the fact that the 3Y spread is now at 116 basis points, a level not seen since 2009".
Meanwhile, private fixed income margins could continue to narrow as the large issuers boast extremely healthy balance sheets and have been reducing leverage during the crisis. As a result their risk-return relationship is now on a par with their international peers.
The big change in 2014 will be the more prominent role played by the high yield markets, with new issuers supplying the large global appetite for this type of risk. While the global market looks set to top €3.5 billion in 2013, this figure could be €5 billion next year.
"We expect a bullish cycle in equities"
The Spanish stock market remains attractive, in both relative terms vs. fixed income and in absolute terms. Ana Munera, Equity Director at Global Markets Research notes that "European equities offer a better upside potential based on medium and long-term metrics. Specifically, indicators that compare price to earnings in the last few years, indicate that the Spanish stock market is undervalued in comparison to its historical averages".
BBVA Global Markets Research believes this upside potential is due to three factors: the expected rise in earnings, the possible improvement in cash flow and a lower market risk premium.
According to Ana Munera, "earnings have reached a turning point and should start to improve over the coming months thanks to the structural reforms being made, the correction in the massive imbalances in the Spanish economy, the recapitalization of the financial system and the ECB's more proactive approach. All this should help improve credit conditions".
With improved cash flow, companies will be able to undertake new investments with a healthier balance sheet.
The third catalyst for stock market growth, the reduction in the risk premium, is linked to improvements in deleveraging and financing conditions returning to normal. For Munera "this factor is particularly positive for Spain which could see its risk premium and the credit spreads of companies continue to narrow".
In sum, BBVA Global Markets Research believes that the IBEX could offer upside of up to 40% in the next two to three years, compared to 20% for the Eurostoxx, assuming a normalized ROE.
For the short term, analysts at BBVA CIB expect the IBEX 35 to offer upside of 18% in 2014, closing the year at 11,000. This is in line with estimates for the EUROSTOXX 50 (+23%) and well above the forecast for the S&P 500 (+7%).
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Photograph: Antonio Pulido and Ana Munera in the trading floor of Ciudad BBVA