People often ask me why I’m so pessimistic. The truth is I’m not. It’s just that I’m pessimistic when I see others being too optimistic. And frankly, that’s been the last few years in a nutshell. When I see punters wildly applauding an opportunity I think “Hmmmm… I wonder what they’re missing?”
Well, today I’d like to let you in on something that goes against what most people think. But as Warren Buffett urges, “Be greedy when others are fearful”… so don’t worry about what everyone else thinks.
If everyone hates it it’s got to be worth a look. And right now, the market that everyone hates is Spain.
But I think there’s an opportunity staring us in the face here. Have a look and see what you think.
The secret of lazy conquistadors and how it could make you a serious gain
It’s easy to despise Spain right now. As part of the deeply unfashionable eurozone, Spain is an entrenched member of the PIIGS, that is the financially impaired countries threatening to pull the euro apart.
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But Spain’s been here before. Please indulge me in an historical digression, but I assure you, it’ll help you understand this Spanish financial hiccup.
The Spanish crisis I’m talking about goes back nearly 500 years. Back then, the Spanish conquistadors were rampaging through Latin America, plundering Incan gold and sailing it back home for king and country. Little did they know that their new found treasure trove was about to land them in serious trouble.
In economist speak, what they’d done was ‘increase the money supply’. Suddenly, the country was awash with money. New found riches allowed them to hang up their boots and import goods rather than toil in the fields. In other words, they ran a current account deficit.
The problem was that once the gold was spent, the economy was too. Without gold to pay for imports and with a rotten manufacturing base they were in trouble.
And then it all happened again
Joining the euro was like the Incan treasure trove all over again. Only this time, Spain didn’t have to rob anyone for their wealth. European banks just handed them euros at knock down prices.
Before the euro, the Spanish paid around 8-15% interest on their pesetas. But just a few years into the euro project and rates were down at 3%. The Spaniards helped themselves from the treasure-trove. Like the gold of Conquistadorean days, money flooded the economy.
The story is well documented. House prices rose by over 300% and a construction boom ensued.
But there’s a critical difference between the gold and the euro boom. And the markets are ignoring it. And it’s this that offers the brave a chance to pick up some Spanish assets at knock-down prices.
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Don’t let the pundits blow you off course
The thing is, Spanish banks and its government put in place certain safeguards. All the years while their economy was trucking along on all that cheap euro debt, their government had the foresight to tuck away some savings. That is they ran a budget surplus. For instance in 2007, the year before the financial crisis, they ran a budget surplus of 2% of GDP.
Compare that to Britain’s El Gordon who managed to rack up astronomical deficits even at the height of our economic boom.
According to The Economist, Spain’s government debt amounted to 53% of GDP last year, whilst the IMF reckons the average for the euro zone was 68%.
And then look at their banks. While we dismantled banking regulations, the Spanish stuck steadfastly to theirs. Banks built up large ‘counter-cyclical’ capital buffers. Effectively they put aside reserves to help them through the inevitable downturn.
That’s why most Spanish banks are actually quite strong. You’ll have you noticed Santander (Spain’s largest) snapping up British banks on the cheap.
Of course it’s not all a bed of roses
I’m not going to say that everything’s a-okay in Spain. The economy’s in a mess, but then whose isn’t? Even with the capital buffers, the banks need liquidity (and need the help of the ECB).
What I’m saying is that the country is solvent and relative to the rest of Europe doesn’t look as bad as some will have you believe.
Which gives us a great opportunity to make some smart investments before the rest of the world wakes up.
Basically, when others are fearful, it’s time to get greedy.
Pick up this growth stock at a bargain basement price
Now’s your chance to pick up one of my favourite Spanish stocks. It’s Telefonica, one of the world’s leading mobile telephone and internet operators. With operations in Latin America, Asia and Africa, you’re getting a global growth stock. It’s just that it’s marred by its Spanish roots.
The stock is on a prospective p/e of only 9.3 times and is set to yield 8.4%. That’s a tremendous payout. While I’m not expecting the dividend to slip, bear in mind a yield up at these levels does kind of imply not everyone’s certain it’ll stay that way!
It’s too cheap for this class act.
Telefonica trades on the Spanish bourse (TEF), or its ADRs are traded in New York (NYSE:TEF)
Source: Barclays stockbrokers
Telefonica share price performance over the last five years:
And Telefonica’s annual returns for the last five years:
+28.50% (2006), +33.52% (2007), -31.62% (2008),+21.46% (2009) and -29.09% (2010).
• This article was first published in the free investment email
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