The iShares MSCI Spain Capped ETF (NYSEArca: EWP), the largest exchange traded fund tracking stocks in the Eurozone’s fourth-largest economy, is off 4% year-to-date. That is a middling performance among the ETFs tracking the PIIGS economies, but EWP and rival Spain ETFs have other concerns.
Recent momentum built up by EWP and Spanish stocks is seen as vulnerable to the country’s increasingly contentious political environment. Last year, Spain and its financial markets dealt with the issue of Catalonian independence as Catalonia makes up almost one-fifth of Spain’s gross domestic product and one-quarter of exports.
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Investors can also consider the factor-based SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) as an alternative to the cap-weighted EWP. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.
QESP is also heavily exposed to the financial services sector with a weight of 33.5% to that group. The factor-based Spain ETF also offers some leverage to the recovering Spanish consumer with over 10% of its weight going to consumer sectors.
“While Spain has largely shrugged off political uncertainty so far, the nine-month deadlock — along with a weaker global backdrop — could be starting to hurt momentum as the next government’s to-do list grows,” reports Maria Tadeo for Bloomberg.
Some market observers believe that Europe’s recovery is still in its early stages and looks durable, pointing to the ongoing decline in the Eurozone’s unemployment rate, which is now at its lowest since 2011, and improvement in consumer confidence, which should buoy earnings growth.
Most European market observers have been critical of European Central Bank President Mario Draghi’s stimulus measures. Specifically, many believe the measures have been too little too late, even after the ECB cut all three key rates this month and expanded quantitative easing.
“The Bank of Spain may provide its own insights into just how much politics is hurting growth when it publishes its economic assessment in the coming days,” according to Bloomberg.
Last year, Standard & Poor’s upgraded the country’s credit rating to BBB+. Spain is the fourth-largest economy in the Eurozone behind Germany, France and Italy.
iShares MSCI Spain Capped ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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