THE eurozone sovereign debt crisis has dominated markets again this week with sharp sell-offs in the Spanish and Italian bond and equity markets. The eurozone equity market overall was down by roughly 5%.
Developed equities, and European equities within the aggregate, were inexpensive to begin with, but the recent fall leaves euro-area valuations looking even lower.
Whilst policy makers and politicians have begun to take action we doubt that valuations will rise materially, but when risk appetite does revive we might expect the euro area index, and Spain and Italy within it, to lead the developed market rebound for a while at least.
The potential attractions of Spanish and Italian stock markets are enhanced if we remember that there are a number of large, liquid companies in each which actually derive the bulk of their sales and earnings from outside their local economy. In our view, such companies may have been unfairly tarnished, with sentiment towards the local economy rather than the underlying fundamentals of the business driving the sell-offs.
If we look at some of the large cap names in Spain, Telefonica and Banco Santander actually derive two-thirds of revenues outside the peripheral region yet are now trading at close to a 40% discount to trend.
Cheapness, of course, does not always drive performance and our colleagues at BarCap are not particularly positive on either of these companies at the moment, believing that company-specific catalysts may be needed for them to outperform. However, given the potential for a revival in risk appetite, such stocks are clearly ones to watch closely.
A stock which BarCap is positive on at the moment is Enel, one of the largest stocks by market capitalisation in Italy. Enel now trades at a 35% discount to its 10-year trend yet derives almost 60% of revenues outside of Italy. Its low valuation becomes even more apparent when compared to Italian utility peer Snam Rete Gas, which trades at less of a discount yet is purely a domestic play.
At a country level, we note that Italy and Spain are currently trading at an 11% discount to the eurozone, whilst Greece itself is trading at a 5% premium. Spain and Italy account for 8% and 6% of the overall European market respectively, while the smaller peripheral companies (Greece, Portugal and Ireland) total less than 2%.
There are in fact very few stocks we can recommend from these smaller peripheral nations, but we do also like the core markets.
Remember that Germany and France account for 43% of the overall Eurozone.
We just suspect that in an immediate bounce, it will be the more liquid peripheral markets that will lead the way up.
:: Andrew Miller, director, Barclays Wealth
