It was just over a year ago that yields on Spanish 10-year
sovereign bonds surged over 7.6 percent. Investors fretted that
the "S" in the infamous PIIGS acronym was headed for collapse and
a subsequent epic bailout.
Spain, the eurozone's fourth-largest economy, offered little
in the way of bullish investment themes, that is unless one
enjoys crippled banks and the region's highest rate of
Fast-forward to 2013 and it is fair to say the iShares MSCI
Spain Index Fund (NYSE:
) has not been as bad of a performer as many would have predicted
at the start of the year. EWP, the lone Spain ETF, is actually
slightly higher year-to-date when accounting for Tuesday's gain.
With EWP holding up fairly well, at least one investor is
cautiously optimistic on Spanish equities.
"I've recently upgraded my view of Spanish stocks to neutral
from underweight," said iShares Global Chief Investment
Strategist Russ Koesterich in a new note. "While Spain continues
to face severe growth headwinds, there are three main reasons why
I'm less concerned about the market now."
While acknowledging the low base, Koesterich says Spanish
corporate profits are poised to recover after the government
there forced a tidying of the banking and real estate sectors.
That is important to investors considering EWP because the ETF
allocates almost 41 percent of its weight to financial services
names, nearly triple the next largest sector weight which is
"While the Spanish economy will likely continue to struggle
this year and into next, most of the bad economic news is now
priced into current valuations,"
said Koesterich in the note
. "This is thanks to Spanish stocks' massive underperformance in
recent years. Since I initiated my underweight call on Spain at
the end of 2011, Spanish stocks have underperformed other
developed markets by around 20%."
EWP currently has P/E ratio just under 18 compared to the
iShares MSCI Germany Index Fund (NYSE:
), which has a P/E of 20.5,
according to iShares data
. The iShares MSCI EMU Index Fund (NYSE:
) has a P/E of nearly 22.
While noting Spain's risks have been lowered thanks to the
European Central Bank's asset purchase proposal, Koesterich did
say the Spanish investment thesis is not risk-free.
"Spanish stocks aren't without their risks. One potential
roadblock on the horizon for both Spanish and European stocks: An
upcoming ruling from the German constitutional court on the
legality of the ECB's proposed asset purchase program," he
Additionally, Standard & Poor's recently said it expects
Spain's unemployment rate to remain high
and Spanish bond yields have started creeping higher again.
Spanish 10-years currently yield almost 4.6 percent, up from
around four percent in early May.
"However, Europe has one distinct advantage to domestic
equities: market watchers' low expectations. In the current
environment, even modest signs of good news can have a positive
impact on European equities in general and on Spanish stocks,"
EWP has $307.6 million in assets under management and a
trailing 12-month yield of 4.61 percent.
For more on
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