Pedro Sánchez was sworn in as Head of Government for the third time last Thursday, after reissuing the government agreement with ERC, PNV and Bildu’s usual partners Sumar and Carles Puigdemont’s party Junts. The same day, Ibex 35 session increased by 0.28% to 9,667 points. Additionally, the Spanish selector finished the week at its highest level since February 2020, with a cumulative increase of 4.2%. The index has continued on its upward path these days despite legal uncertainty and an “increasingly complex business environment” that big business leaders have condemned.
In fact, the amnesty law that made the investment agreement possible was harshly criticized by employers. CEOE, Cepyme and Empresarios Círculo, but also by businessmen such as Mercadona president Juan Roig, Mapfre president Antonio Huertas or Valencian shipowner Vicente Boluda. “Economic policies are being proposed that put the financial costs on companies. (…) It is very difficult to ensure economic growth and employment creation,” he said.
Beyond the statements, Bank of America’s monthly survey among nearly three hundred fund managers also attracted attention. Ranks Spain as the worst country to invest in the Eurozone. “This concerns us because in recent years we have seen a steady decline in the volume traded on the Spanish stock exchange: from 962.166 million euros traded in 2015 to 362.105 million euros in 2022. iBroker analyst Antonio Castelo said that rating agency Moody’s this weekend announced that Spain’s He states that he has made warnings indicating the possibility that the debt rating may be revised downwards.
So why did Ibex 35 reach the highest level since February 2020 with this cocktail? “This is not a paradox. The Spanish selector consists of Spanish multinational companies that depend more on the development of the global economy than on the national situation. The index has broad visibility in Latin America and the US, European Union… Likewise, what moves the stock markets around the world is the decisions of the Federal Reserve and the European Central Bank (ECB), and interest rates are expected to remain at current levels at least until July 2024. . From here, investors predict that central banks will lower interest rates to avoid accelerating the economic cooling. Therefore, the market Interest rate increases are not expected in the short term and this benefits the stock markets.”explains Víctor Alvargonzález, founder of independent financial advisory firm Nextep Finance.
But Alvargonzález is aware that the policy worries investment funds and international investors. “It could have a greater impact on the real economy, SMEs, international investment plans and domestic investment plans, which may slow down,” he laments. “The first thing international investors look for is legal stability and this Government does not provide that.”Javier Niederleytner, professor of the Master of Stock Markets and Financial Markets at the IEB, says:
One of the things that is specific and worries businessmen is that the agreement between PSOE and Sumar provides for extending the contract indefinitely. Extraordinary tax on banks and energy companies also tightening corporate taxation to a minimum of 15%.
“As a general rule, political tension and uncertainty often have a negative impact on activity, confidence and funding, or worsening relative performance and/or lower valuation multiples over the long term. “Although double-digit earnings growth is expected next year, the Spanish market is trading at a price-to-earnings ratio (PER) of 10.6 times: a coefficient half that of Wall Street,” comments broker CMC Markets.
Portugal overtakes Spain
Sánchez’s re-election as head of the Spanish Government also coincides with the decline in the yield on the ten-year Spanish bond. The Spanish risk premium, the difference paid by a ten-year national fixed income over the interest rate on a German bond, is below 100 basis points. This has not happened since the end of June.
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However, the Ministry of Economy needs to pay attention to the reality that Portugal has been experiencing since the beginning of this year. a premium below that level and currently stands at 62 basis points.
“Portugal has been governed by the Socialist Party in recent years and The development of the country of Portugal has been much better than that of Spain. This is not a question of political ideology. The problem is different,” says Castelo.