“The City and Wall Street dished out an unreasonable level of punishment to the euro”

IturbeTCbaja

Q. Do you find the performance of the Ibex frustrating this year, given that the index is ranging between 10,000 to 11,000-well below the highs of 2007- while other European markets have surpassed those levels? Is it logical that the Spanish market is growing at this pace?

A: No one doubts the growth prospects of Spain anymore. Foreign investors who fled Spain between 2008 and 2012, have returned. And this is not an opinion, there are data that confirm it. What is happening is that banks have a huge weight on the IBEX and now banks are not among the most recommended stocks. That’s what the markets appear to think, at least.

Q: And what do you think?

A: I sincerely believe that banks, especially the Spanish ones, have conducted a massive clean up operation which has improved their health and that they will soon start reaping the rewards. Anyway, for the companies hard up on the Ibex, it is essential to increase profits. Do not forget that the multiplier of the Spanish stock market is already above the historical average. We must not forget that some banks have been making large capital increases: Santander raised €7.5 billion euros, and such operations are not liked by investors.

Q: For months, years even, we have been hearing that banks have been cleansed, and yet, they still require capital increases. Why is this?

A: Well, in my opinion, it is because supervisors have been increasing their capital requirements. The numbers are fixed. Santander expanded its capital and reduced the dividend by 50% to replenish its core capital ratio.

Q: Could it be that the business continues to deteriorate or more delinquencies are emerging?

A: No, it is simply that supervisors have become much more demanding.

Q: Why does what happens to the banks have such an impact on the Ibex?

A: Look, acquiring German stocks, you are buying into industry, pharmaceuticals and the best automotive industry in the world. In Spain, the Ibex is made up of banks, Telefónica, utilities companies, some construction firms and Inditex. Full stop. And Spanish GDP is much more than that.

Q: Anyway, even if banks are not at their best, why does it affect other stocks, including those that are performing well?

A: Do not be fooled. Those who move the markets are large operators and these generally do not operate with specific stocks. If a large operator, an investment bank, an institutional investor or an asset manager want to move the market, they will bet on the Ibex index as opposed to individual stocks.

Q: Banks shares are not only low in Spain, but also across Europe. Are there fears that we could be returning to the systemic problems seen before?

A: I really do not think the banks will have systemic problems. But another thing is that there are local entities- savings institutions on a localised level that may have some problems, I do not know. But that does not change the basics: the big banks, systemically, are in good shape.

Q: What do you think of this new trend of banks closing branches? Are we moving towards a new banking model?

A: No. There are many people saying that we are seeing the end of the bank branch. I do not agree. I go to my office and I always see people queuing. It is true that there was perhaps an excessive network, but the branch remains an important part of the system. I do not believe that everyone will carry out all their banking on their phones. Maybe years from now, but not yet.

Q: Going back to Ibex, the Spanish economy is doing better than the German economy, yet the DAX has gained more than the Ibex. Why is that?

A: This is easy: any international investor, seeing that the euro has fallen against the dollar from 1.4 to 1.1, concludes that the Europeans will now export more. And who is the biggest exporter in Europe? Germany. We sell tourism but we have no major operator in the sector at the top of the market. Companies that are in the DAX are basically exporters. That means the DAX has benefitted from the fall in the euro and the Ibex has not. I do not understand why the drop in oil prices has not had more of an impact on European stocks, except of course in the case of airlines.

Q: In the US, the fall in oil prices has been seen as a crucial ingredient for spurring growth, whereas here there was more concern about the impact on inflation. Would you agree?

A: The USA has also affected the fall of the oil price. Shale gas production has had a balancing effect on the country, which was the largest importer of oil, to the point where it will soon start exporting. Hence, some producing countries have reacted to this new factor by trying to defend their production levels. Why? Allowing prices to fall has forced the closure of US shale holdings, which are no longer viable at current oil prices.

Q: Given the strong fall in crude, does Repsol represent good value or is it better to forget about that stock?

A: It is interesting to me because of all major European oil companies, the least dependent on the extraction business is Repsol. A Galp, for example, which is smaller, has seen more damage from low prices because it lists higher costs for extraction on its income statement. Anyway, it is true that with oil at these prices, the industry is not at its best, but the fact remains that oil will begin to be viewed at attractive prices. If you believe that prices have bottomed out, buying Repsol or oil stocks in general would not be a stupid move.

Q: Do you think that low oil prices can be maintained in the long term?

A: It is possible.

Q: It is said that Spaniards have never been large financial investors. Do you think what happened with all these scandals- like Bankia- has given the credence to the distrust of investing in these products?

A: Spain is far off the financial investment seen in countries like the US or the UK, but there is more investment in equities here than there is in Japan or Germany. Anyway, it is true that there is no cultural tradition of investing in such products in Spain. Spaniards prefer to invest in things like property, which is why we have one of the highest rates of real estate consumption. Then there is another critical issue: Spain is a country of bank branches, so Spaniards have tended to invest in the products offered to them in the local office, which were often term deposits for example, and indeed other less fortuitous products.

Q: It is said that is changing…

A: Right. Little by little they have been investing in mutual funds, which provides a form of access to equities. Another thing is that, in 2013 and 2014, there have been strong investments in fixed income and returns have been excellent. Now this period is over. Rates are already very low and spreads even lower, so you could even speak of a bubble in bonds. In the end, Spaniards have no choice but to invest in stock markets. There is no acceptable alternative if you want a return. Certainly, that contains risk.

Q: We seem to be seeing a return of the property market. What do you think?

 A: Real estate is bottoming out, or has already, but the cycle ahead will be a long one for the real estate market. I do not see spectacular medium term revaluations of such assets.

Q: Why is that?

A: For many reasons: there is no population growth, the population pyramid is inverted and wages are not growing. And that’s not all. There’s the Lagares report, which has been parked, but which has already noted the need to replace the unfair tax on capital by a rise in property taxes. What is clear is that there will be increased taxation on property and that will prevent strong revaluations.

Q: There will be positive factors accruing when investors commence construction, including some of the large fortunes that have come to Spain.

A: Yes, there will. Rates are low, which means that, together with favourable prices, the cost of acquiring property is lower than before the crisis. Anyway, banks are no longer doing the crazy things they were before. Now, homeowners only get 75% or 80% of the value of a home on a mortgage, and appraisals are conducted in a much better way.

Q: What is undeniable is that in recent months we are seeing a flurry of major real estate transactions, especially involving foreigners.

A: That’s because big foreign investors cannot go to into small funds and instead have to undertake the purchase of huge assets in large operations. The market has also been encouraged by such low rates, and those investors will achieve returns of 4% or 5%, which is not bad.

Q: We are talking about Greece again? Should a small country be able to keep the entire euro zone and the markets in suspense?

 The markets have been particularly hard on the euro and Europe. The Anglo-Saxon countries, where the major markets are-London, New York- have been extremely sceptical about the euro and have taken advantage of every situation, and not just in 2012, when it looked like everything was going to blow up and the foundations of the euro were undermined. And why is that? Because a united Europe is a competitor of the highest order, and a Europe that is divided won’t bother anyone. We cannot forget that when it looked like the world’s axis would be in Asia-Pacific, Europe emerged with the euro and became a great power. It has become a major competitor against the dollar, the great enemy.

Q: Is it not that they see the euro as an impossible experiment and do not share political beliefs that are evident here? 

That could be one way of looking at it, but I remain convinced that markets have been over critical of Europe. Nobody seems to speak about the tremendous growth in the balance sheets of the Bank of Japan or the US Fed being systemic risks. But when we go to do it in Europe we are pilloried. I think the frenzy that has been assembled around Greece has little justification. It is an economy that represents only 2% of European GDP, and yet, it has caused real crashes on the markets.

 

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