According to the Spanish Labor Ministry, the fourth-largest economy in the eurozone saw the first annual improvement in employment since May 2008. Their unemployment indicator decreased in 227,736 people compared to February last year. This trend change, coupled with the fact that Spain has started to show positive GDP growth, is encouraging. A consistent rise in exports helped GDP grow by 0.3% in the fourth quarter after a protracted recession. Several signs tell us that Spain is on the right track for recovery. But wait -- there's more..
If you look at Spain's 10-year bond yield, you'll notice that it briefly traded below 3.65% -- the lowest yield since 2006, when Spain had a "AAA" rating from all three major credit agencies. This past November, Fitch revised Spain's outlook from negative to stable, and its peers followed suit. So, slowly but surely, the country is improving, and it might mean it's time to start a position in Spanish assets.
How are Spanish stocks performing?
One ETF that serves as an indicator for Spain's market is the iShares MSCI Spain Capped (EWP +2.09%). This fund is up 3% year to date, but it has grown 40% since the end of June 2013. It appears the market is becoming more optimistic about the country. In fact, Bill Gates, Warren Buffett, and Carlos Slim started increasing positions in Spain last year.
Bolstering the balance sheet
Spanish oil company Repsol (REPYY +4.81%), much like its home country, is working hard to dig itself out of debt and generate capital to invest in its future.
The first indicator is its debt reduction. During 2013, Repsol's net debt dropped 28% to $7.4 billion, and the company's current available liquidity reached $12.9 billion at the end of the year. Its cash and cash equivalents rose 26% to $10.2 billion from December 2012 to December 2013, and from this point on, liquidity can only improve.
Repsol's management made two important decisions: It sold liquefied-natural-gas assets in South America to Shell for $5.4 billion and signed a $5 billion agreement with Argentina to end litigation over its nationalized YPF (YPF +0.78%) division. These decisions align with the company's strategy to reduce debt and sell noncore businesses. After Argentina nationalized YPF in 2012, Repsol had to rethink how to operate in South America and seized on the opportunity. Repsol's original claim for its 51% stake of YPF was more than $10 billion, but soon after the oil giant realized that an international settlement could take a long time and that the final amount could be lower, so negotiations took place.
Overall, these are smart moves, as the large amount of incoming cash will reinforce Repsol's financial strength and increase investment capacity on core assets during the next few years. This company's performance does not serve as an indicator for the Spanish economy, but there are some distinct parallels between the two..
Expanding in the U.S.
Another promising Spanish ADR is Grifols (GRFS +4.17%), a strong player within the global plasma-derived protein business. In fact, it is the third-largest producer of plasma products globally.
The company recently acquired Novartis' diagnostics unit for $1.7 billion. This operation will complement Grifols' plasma business, as the company has now secured a dominant market share in blood and plasma testing in the U.S. The new diagnostics business will account for a fifth of revenue compared to 4% up until now. It is expected that the annual turnover in the business will grow to about $1 billion.
Grifols performed quite well in the third quarter, with net profit growing 35.3% to $370.1 million. Revenue from the U.S. spiked 14% to help Grifols achieve record sales in North America.
However, only 7.6% of sales are generated in Spain, thus an improvement in the country's GDP and employment would not significantly enhance the company's prospects.
Final thoughts
The fact that Spain is finally creating jobs instead of losing them is encouraging and could be the first sign of robust future growth. Spanish unemployment improved the most in construction, industrial production, and services, probably indicating that a better performance will continue to come from these sectors. In fact, all-sector growth in Spain hit a 77-month high in December, with a strong contribution from manufacturing and services.
Some analysts consider that the market was a little too quick pricing in the country's improvement, and this argument is valid. However, numbers don't lie. (OK, so they can sometimes prove wrong or be revised, but you catch my drift.)
iShares MSCI Spain Capped has stormed ahead over the past year, and it will probably keep growing if economic conditions in the country continue to improve.
Grifols is, and will remain, a low-cost provider of plasma-derived therapies. The evolution of the Spanish economy should not make a significant difference for the company, which will preserve its high manufacturing yields and continue strengthening its brands across the globe.
Repsol is showing improvements as well, and 2014 looks good for the company. It will be important to monitor what use Repsol makes of the incoming cash it will receive in the following quarters.
