The strong fall in oil prices in recent weeks and its knock-on effects has caused a clear deterioration in investor sentiment. However, we see this downward adjustment in the market as an opportunity for purchasing assets with good fundamentals. The oil price could be reaching floor levels, the accumulated liquidity is very high and the interest rate levels for risk-free assets will remain at all-time lows.
"We are also convinced that Europe, as is already happening in the U.S., will be able to channel those liquidity pools into the real economy, with capital markets playing a leading role, and therefore reflate its economy", said Antonio Pulido.
In this context, Spain will continue to be an attractive asset class. The Spanish economy will continue to grow above the EU average, the financial system has completed the restructuring process, the structural reforms implemented are already resulting in job creation, financing costs will remain at all-time lows and a certain recovery can be seen in the net financial wealth of households.
The Spanish fixed-income convergence process has not been exhausted
In the fixed-income market we expect the Spain-Germany 10-year spread to narrow further and we do not rule out a breaking of the 100 basis points, with the next target standing at 70 basis points. Greater investor risk appetite for the longer sections of the curve has been seen in recent months, especially at 10 years, as well as renewed interest in inflation-linked bonds.
In corporate fixed income, we continue to see value in the current spread levels of Spanish high-yield securities and in hybrid debt, both financial and non-financial.
We continue to expect a bullish cycle in equities
Although 2014 has been a difficult year on the stock market, with returns varying widely by geographical region, the stock market's bullish cycle has already lasted more than two years. Returns on the Spanish stock market, including dividends, have been close to 5% this year, and reach 30% if we consider the returns accumulated over the last two years.
BBVA's Global Markets Research team continues to be positive about the stock market in 2015, with an IBEX target of 12,000 at the end of 2015 and a scenario of expected gains over the next 2 years of more than 20-25%.
These potential gains are based on three factors:
- The prospects for an improvement in the economic cycle and in corporate profits, supported by a more expansive policy-mix, and with several additional key drivers: the euro's weakness and lower oil prices.
- The increased cash generation capacity of companies, which will continue to support an attractive dividend yield.
- Support of relative valuations, due both to reduced risk premiums and a gradual normalization of the return on equity of listed companies.
However, it is important to remember that we are now in a more advanced stage of the equity cycle and more dependent on the compliance and profit acceleration of listed companies. In this stage of the cycle, the selection of stocks and sectors becomes more important and tends to cause greater fluctuations in the markets, as evidenced by the market correction seen in October or at the end of this year. Despite this, we continue to see equities as the asset that offers the highest risk-adjusted return.
After two years marked by the excellent performance of more defensive sectors, and in which the regulatory risks have been clarified, we now prefer to move toward sectors with a somewhat more cyclical profile, but where long-term growth forecasts are better and more sustainable, whose average valuations show average discounts of 11% compared with their historical averages, and whose margins will benefit more directly from the expected positive surprises in the volume and income cycle.
By styles, we believe that the small cap universe continues to offer a greater relative appeal, compared with companies with larger capitalization, due to three key elements: i) the deleveraging already completed by the companies, which will result in greater focus on cash generation in the coming years; ii) improved access to funding and the potential reduction in the financial cost and a boost of EPS growth; and iii) the gradual consolidation of the demand cycle in Spain and its positive impact on volumes. The discrepancy that still exists between price and fundamental value is of key importance in this company segment, and makes it very likely that the corporate operations cycle will continue in 2015.