Managers split on Spain as it outshines eurozone

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Fund managers are mixed on whether Spain can continue to outshine the eurozone in the year ahead as it delivers full year growth of 3.2 per cent in 2016 – almost double the eurozone average of 1.7 per cent.

However, HSBC has forecast momentum to slow in 2017 to 2.5 per cent as inflation hits and the Government, which formed late in the year after almost 12 months of political gridlock post elections, introduces austerity measures.

The Miton European Opportunities fund, which has delivered 28.4 per cent over the last year, is “strongly” underweight Spain, says co-manager Thomas Brown.

“Spanish GDP growth has been outperforming the rest of the Eurozone but most of this has been put on the credit card – Spain continues to run a budget deficit well above what was agreed with Brussels – which is why debt-to-GDP has not fallen.

“With youth unemployment still high, young people are emigrating in increasing numbers and the big fear for Spain is that if this continues, there will be no-one left to pay off the debt.”

Brown adds that there are better stocks in Europe than the banks and utilities that make up the majority of the Spanish market.

GAM macro strategist Michael Biggs says it is a “measure of Spain’s success” that a slowdown in growth to 2.5 per cent is viewed as a disappointment and expects risky assets to perform well if that is achieved.

“The year has started well – January car sales were up on Q4, and the manufacturing PMI increased further,” Biggs says.

Bibiana Carretero, portfolio manager for the New Capital Dynamic European Equity fund, says she remains positive on Spain, but is more cautious than last year. She points out the country has just seen its 40th monthly year-on-year reduction in unemployment.

Despite being overweight she has limited exposure to the Spanish consumer with rising inflation to be a counterforce to confidence and improved employment figures.

The New Capital fund has returned 5.1 per cent over a one-year period compared to 22 per cent in the IA Europe incl-UK sector. Over the last six months the fund returned 7 per cent, compared to 9.5 per cent in the sector.

“Fiscal policy will be the main change this year. With a government now in place, Spain has to start addressing its primary budget deficit, especially in light of probably a lower growth (albeit positive) for this year.

“Although growth is expected to be lower this year than last year, it will still surpass growth in many other European countries.”

Martin Todd, co-manager of the Hermes European Alpha Equity Strategy, which has returned 21.5 per cent over the year, says he likes Inditex, which currently generates around 18 per cent of sales in Spain, but with further potential for growth in the US and China.

Todd sees substantial upside in Gamesa following its merger with Siemans to become the world’s largest wind turbine manufacturer. It is due to deliver an 18 per cent special dividend and sustainable 10 per cent growth, Todd argues.