The fallout from the disputed Catalan independence referendum last year has coloured investor sentiment towards Spain but the underlying fundamentals – a stable banking sector, a positive external balance and declining unemployment – remain solid.
The risk of significant domestic political upheaval is diminishing and the Bank of Spain has raised its growth forecast to 2.7% this year (from 2.4%) and big three rating agencies – Moody’s, Standard & Poor’s and Fitch – have upgraded Spain’s credit rating to A- or stable.
The Latam connection
Another factor behind key Spanish corporates strong Q1 results is their deep roots in large Latin American economies such as Brazil, Argentina and Mexico. Many corporates that make up Spain’s benchmark IBEX 35 – such as Banco Santander, telecoms group Telefónica and utilities giant Endesa – generate more than a quarter of their revenues in Latin America.
Global-minded Spanish companies have expanded aggressively in Latin America over the last couple of decades on the back of the two regions shared history, culture and language.
Banking giant Santander’s biggest market, for example, is Brazil. Energy group Repsol owns Argentine oil and gas YPF. Another energy group Iberdrola owns Brazil’s Elektro and utility company Endesa has a controlling stake in Enel Generación Chile, the largest electricity generator in Chile.
And the growth prospects of many of Latin America’s leading economies is looking positive on the back of rebounding commodity prices – which is providing a shot in the arm for Spanish corporate earnings.
Brazil, Latin America’s largest economy, has returned to growth following a turbulent few years and is projected to grow by 2.1% this year. Mexico is on course to expand 2.2% this year and Argentina’s economy is projected to grow 2%, despite the challenges faced by President Mauricio Macri’s reform programme.
Solid Q1 results
Endesa, for example, posted a whopping 47% rise in net profit for Q1 to €372m on the back of rising demand for energy across its international operations and its domestic market.
Banco Santander, meanwhile, saw a 10% rise in Q1 profits, also supported by the economic recovery in Brazil. Profits at the bank’s Brazilian unit rose 27% to €677m. In Spain – where Santander expanded last year following the acquisition of rival Banco Popular – its profits increased 26% to €455m. However, the banking giant’s UK division has continued to struggle.
Iberdrola’s Q1 results also exceeded expectations, helped by robust energy demand from Brazil. The group reported a 14% jump in revenues and a 1.2% rise in net earnings following the integration of Brazilian unit Neoenergia to create the biggest electricity utility in the South American country.
Spanish oil major Repsol posted an 8% year-on-year increase in first quarter profit to €616m supported by rising oil prices. Repsol has operations across Latin America including Argentina, Bolivia and Venezuela.
However, not all Spanish corporates with Latin American networks saw a jump in Q1 profits. Telefonica posted a 3.9% fall in Q1 profit to €837m compared to a year earlier as improvements in the domestic market were offset by currency pressures, the group said. Argentina is Telefonica’s second-biggest market in Latin America after Brazil and the group plans to sell shares of its Argentine unit via an IPO.