(Bloomberg) -- Spanish assets have become investor favorites, a sure sign that the country has finally moved on from the trauma of its sovereign debt crisis more than a decade ago.
Despite a pullback on Tuesday, Spain’s stocks have outpaced other major European markets this year, with banks leading the charge thanks to a resilient economy. And it’s not just equities: investors are piling into the country’s debt. For the first time since 2007, France’s bonds have been judged to be riskier than those of its southern neighbor.
The Ibex 35 is up 16% in 2024, beating other major European markets. The index is a near 15-year high and also on course for its best two-year rally since the heydays of 2004-2006. Banks may have led the charge, but the strength is broader, helped by earnings estimates that are rising faster than anywhere else in Europe.
“Spanish equities are benefiting from a number of tailwinds such as the good progress in macro conditions, driven by tourism and spending,” said Francisco Quintana, head of investment strategy at ING Spain. “They offer high dividends and even cheaper valuations within an already inexpensive European market.”
Those soaring earnings estimates mean that stock valuations still screen relatively well. The Ibex trades at a forward price to earnings ratio of just above 11, near its historical average. That’s a hefty discount of almost 20% to the regional Stoxx 600 benchmark.
The economy is faring well, overall. Record tourism and strong exports have resulted in one of Europe’s fastest growth rates, while unemployment is near the lowest in about 17 years.
It’s all a far cry from 2012, when Spain turned to the European Union for 41 billion euros ($45 billion) to prop up its lenders. Their mounting real estate losses were undermining confidence in the country’s government bonds.
Gross domestic product will expand by 2.7% in 2024, compared with a previous forecast of 2.4%, the government said earlier this month. Compare that to the sluggish 0.7% across the wider euro area, while Germany expects no expansion at all this year.
Spanish banks, which make up almost a third of the Ibex 35, have benefited from the economic resilience. Interest rates remain high enough, even with the European Central Bank starting its easing cycle, supporting their main business of lending.
Beyond the banks, Inditex SA and tourism-related companies like airport manager Aena SME SA and airline operator IAG SA have played starring roles in the rally. The Zara owner has jumped 33% this year, boosted by its surging sales. Inditex alone has provided 30% of the Ibex’s gains. Clean energy provider Iberdrola SA can take credit for 21% of the advance.
So, what could potentially go wrong? A high dependence on banks just as the ECB steps up rate cuts and Inditex failing to keep up its breakneck sales growth next year are possible headwinds.
Morgan Stanley analysts have just downgraded banks to in-line from attractive, noting that Spanish lenders’ sensitivity to changes in rates has been understated relative to European peers. Still, the Spanish benchmark equity index also has a healthy 19% weighting in utilities, which as bond proxies, directly benefit from lower rates.
The appetite for Spanish assets was evident in the latest Bank of America Corp. fund manager survey, with the country second only to the UK as the most-preferred equity market. Fund managers pivoted from being underweight Spain in August to being overweight in September, in contrast with Italy, France or Germany.
But, based on analyst price targets compiled by Bloomberg, the Ibex 35 is expected to gain 10% over the next 12 months, slightly lagging behind the Stoxx 600’s 12% projected advance.
“There is too much optimism as the stellar last 12 months will be difficult to repeat,” said ING’s Quintana. “Yes, Spanish equities will still be positive, but with more modest gains.”
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