Tenerelli, the fund manager who ‘discovered’ Spain in the midst of the crisis

This is an edited version of the conversation:

Question: Which Spanish stocks do you have in your portfolio?

Answer: Tele 5, Antena 3, Inditex, Amadeus, BBVA, Bankinter, Bankia, Enagas, Red Electrica, Gas Natural, and Telefonica.

Q.: You were among the very first investors in putting money into Spanish companies. Why?

A.: Because, after Ireland, Spain is the fastest country in adopting the necessary measures to escape the crisis. And the results are the same, or similar, as in Ireland.

Q.: When did you start investing in Spain?

A.: During the crisis, I bought Inditex. It was the first time that I held that company’s stock, and I did it because it was not overvalued. I also bought Amadeus at 11 euros. Both firms had most of their businesses out of Spain, so it seemed logical to me investing in them.

Q.: How did you see the Spanish market at the time?

A.: Oversold. People just wanted companies with exposure in emerging markets, mainly in China.

Q.: Progressively you became more and more bullish with Spain. Why?

A.: First because the fall in the labor costs and, later, because the reform of the ‘cajas’. The Spanish Government tried to postpone the latter as much as it could, because the political connections of the ‘cajas’ were huge. But the whole sector is being reformed and, from 60 ‘cajas’, we are going to have 10 or 11. The ‘cajas’ were in the midst of a process of irrational asset pricing, and they were around 50 percent of the whole financial system, so their influence was huge.

Q.: You have just said that Spain is on its way to follow the path of Ireland. However, does the market discriminate Spain and Italy or still put them in the same basket?

A.: Well, people compare both countries, and realize that the two have very cheap stock markets. But Italy has done nothing with its ‘popular banks’, which can be considered like its equivalent to the ‘cajas’. On the other hand, Italy’s banking crisis has been way smaller than Spain’s.

However, when given two stock markets to choose from —one in a country that has done a lot, and another in a country that has done nothing — people logically stick to the first.

The big question, however, is the evolution of Spanish internal demand in 2014. Internal demand in Spain has fallen dramatically, and that has created fear about the recovery not arriving in 2014.

Q.: Let’s go back to your strategy. After taking positions in Amadeus and Inditex, because of their lack to exposure to Spain, you expanded your Spanish portfolio.

A.: The second step was going into utilities. They were very cheap, with Earnings Per Share (EPS) of around 9, and dividends of 7%-8%. True, they had regulatory risk, but since then this has been solved without causing the industry excessive damage. Then, I focused on television broadcasting stations. They have gone from four to two. That is a ‘de facto’ duopoly in capturing advertising, even in advertising has been falling. I have also bought stock in television stations and advertising firms in France.

And the last movement has been into the financial industry. I have recently bought Bankia shares, because I think that the bank has a superb management that it is doing one of the best restructurings that I have ever seen, particularly in areas such as Information Technologies and staff, and it is getting better results even before it thought. This doesn’t mean, however, that the European banking industry is going to necessarily achieve the healthy state it has in the United States or, for the matter, the whole variable-income market.

Q.: Could you elaborate a bit?

A.: If we give a 100 value to the Earnings per Share (EPS) 2006, we see that it is now at 126 in the US, but just at 86 in Europe. That reveals a tremendous destruction of the internal demand. If we adjust the EPS to the cycle, we can see that in the US and in Europe it has been 24 on average. Now, however, in the US it is 19.7, whereas in Europe it is just 13.7. That shows a big upside potential in Europe, but also poses the possibility that Europe will ever —well, ‘ever’ is maybe too much, so let’s say ‘in a really long time’—retakes the 24 average, because the destruction of wealth in this crisis has been immense.

 

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