Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Weaker Emerging Currencies Will Affect These Spanish ADRs

The extraordinarily favorable conditions that the emerging markets enjoyed from 2009 to 2011 have started to vanish. It's no coincidence that commodities and equities in these economies underperformed the major indexes of developed markets, such as the S&P 500 and the DAX, since 2011.

And because Spanish companies have been strongly expanding internationally, focusing primarily on the emerging markets (especially Latin America), the current devaluation process in these economies is raising concerns among investors. We're talking about 74.8 billion euros in investments being exposed, so it's no joke.

Last Friday, the Argentine peso made its largest one-day drop against the dollar in more than a decade, while other emerging currencies like the Brazilian real, the Turkish lira, and the South African rand have also taken a hit. These corrections are likely to continue throughout this quarter, so be prepared.

Given the circumstances, let's see how these three Spanish ADRs are performing, given their exposure to the emerging markets.

At the mercy of Mexico
First, here's the second-largest bank in Spain and one of the largest banks in the world, Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) .

A key issue to consider when analyzing BBVA is that only one-third of its income comes from its home country; the rest comes from its ventures in other markets. The bank is highly exposed to Turkey, where it owns 25% of Garanti, the country's second-biggest bank. This week, HSBC downgraded the bank to neutral because of this factor. Mexico is an issue as well, as operations in the country accounted for 42% of the group's results in the first nine months of last year. Although the outlook is positive for Mexico, it could have a negative impact if the devaluation of its currency accelerates.

Back home, the situation is uneasy as well, as Spain's unemployment remains around 20% and there are still risks of high loan-loss levels until the country shows sustained improvements. Thus the bank might not be in a position to pay significant dividends in 2014, as the majority of European banks will continue retaining capital to stay well above minimum capital requirements and to deal with acknowledged problem assets on their books.

Better prepared?
Second, here's Spain's largest lender, Banco Santander SA (NYSE: SAN  ) . This bank has a good record of profitable overseas expansion.

Santander is among the top banks in each of its markets in Latin America, so its exposure there is significant. Brazil accounted for 24% of attributable profits in the first nine months of 2013. Mexico brought in 11%, and Chile accounted for 6%. In fact, the whole of the continent is responsible for 49% of profits, so Santander investors must keep an eye on the region.

In addition, parts of Santander's regional positions in Latin America float in the local stock exchanges as Santander Brasil and Santander Mexico. Because financial institutions are often the first ones to make a correction in uncertain markets, Santander could experience a drop in its market capitalization as money flows out of these investments.

Nonetheless, this institution has historically shown outstanding aptitude for managing credit risk. It has overcome multiple crises.

Blowing up your telefono
Finally, here's the Spanish company with the greatest presence in Latin America, telecom giant Telefonica SA (NYSE: TEF  ) .

Problems have faced Telefonica for quite some time already. In fact, it goes back to when it overpaid for Portugal Telecom's stake in Vivo, its Brazilian wireless operator. The debt taken on for this operation, along with the rise in Spanish interest rates as a consequence of the recession, restrained the company's operating flexibility.

But recently, the Latin American currency weakness started to add additional pressure to Telefonica's revenue struggles. The continent, which accounts for 48% of revenue, remains one of the best-performing regions for the company, with Brazil as the star. If a recession strikes the region, cash flow will be seriously compromised, and consequently, dividends will be reduced.

Final thoughts
The outlook is not very promising for the banks BBVA and Santander in the near term. Both are exposed to weaker business in their home country and abroad. Due to its track record, Santander might be in a better position to withstand the downturn, but its stock will still make a correction opening possibilities for longer-term positions.

Regarding Telefonica, the key will be to determine how deep the slowdown will be in the continent and how inelastic the demand for telecom's products is in the region. I suggest investors keep an eye on the company's sales levels.

Play Emerging Markets the American Way
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2817635, ~/Articles/ArticleHandler.aspx, 9/4/2015 11:58:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Louie Grint

I am a curious economist who likes to investigate what is behind asset price movements across the globe. My articles range from industry analysis of various sectors to understanding global macro events that could trigger volatility in the markets.

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:00 PM
BBVA $8.74 Down -0.17 -1.91%
Banco Bilbao Vizca… CAPS Rating: **
SAN $5.72 Down -0.14 -2.39%
Banco Santander Ce… CAPS Rating: ***
TEF $13.10 Down -0.27 -2.02%
Telefonica S.A. (A… CAPS Rating: ****