LEADING: Spain (ESP35) is neck-and-neck with Italy as the world’s best performing major stock market this year. Their 16% gains are well ahead of the 6% for global equities. They have both benefited from the financials fuelled European stocks rebound. Off particularly cheap and derated valuations. With their Q4 earnings surprisingly rising c30% versus last year. And as broader macro ‘fragmentation’ and growth risks cool. They also have a number of significant differences, from Spain’s LatAm exposure to Italy’s luxury stocks and M&A activity. Still cheap valuations and the earnings rebound should provide some support to the inevitable market volatility to come. With inflation still high, interest rates rising fast, and the Ukraine war ongoing.
SIMILARITIES: Banks account for a third of both markets, from Santander (SAN.MC) to UniCredit (UCG.MI). This is the biggest proportion in Europe, and led the gains this year. They also have huge tourism sectors and this ‘reopening rebound’ continues, helping stocks from Aena (AENA.MC) to Melia (MEL.MC). But both markets’ stocks still get over 60% their revenues from abroad. Valuations are cheap, even by Europe’ standards. Italy’s 9x P/E and Spain’s 12x are low. And the valuation gap vs US has widened dramatically in the past decade (see chart).
DIFFERENCES: Spanish stocks’ big LatAm sales exposure has been a mixed blessing this year after a strong 2022. Mexico’s market strength has continued but Brazil is now digesting the new leftist Lula presidency. Italy has benefitted from the continued luxury rally, from Ferrari (RALLY) to Moncler (MONC.MI). Italy’s rock-bottom valuations have also attracted M&A, including KKR (KKR) and Macquarie’ (MQG.ASX) current takeover battle for Telecom Italia’s (TIT.MI) assets.
All data, figures & charts are valid as of 07/03/2023