Spanish stocks ride sour news higher

By Eric Uhlfelder, Investing Across Borders

April, 2001

During the second week of April, Spain's equity markets performed a bit of alchemy, turning poor macroeconomic data, profit warnings, the lack of an interest rate cut and more uncertainty in Argentina into a nice 3.4% gain.

Madrid's benchmark IBEX-35 Index closed April 17 at 9,526, up 2.3% since the beginning of the month. Gains on Wall Street helped. So did mergers and acquisitions activity in the utilities sector. However, there was little else on the domestic front to justify the market's enthusiasm, suggesting the rally may soon run out of steam.

Growth with a small 'g'

Faced with evidence such as February's surprise 1.6% drop in industrial production, Spain officially lowered the country's projected growth rate for 2001 to 3.2% from 3.6%. This follows on the heels of the OECD reducing its eurozone growth projections by 0.4% to 2.7%.

However, the latest OECD's projections were contingent on an interest rate cut by the European Central Bank (ECB), a cut that didn't happen. Ignoring the cries of distress from Germany - which absorbs nearly a fifth of Spain's exports - the ECB decided to put inflation containment ahead of economic stimulus.

The ECB has some cause for concern: in Spain, the eurozone's fourth-largest economy, inflation in March ran at nearly double the ECB's 2% target rate as surging food prices offset slackening domestic demand.

Where are the profits coming from?

Part of the reason demand is slackening is the 13% chunk of the Spanish workforce without a job. That, and the general slowdown in the US and Europe, is forcing investors to ask where profits will come from over the next two quarters.

So far, the answer has been exports, especially to Latin America. But Argentina's inability to get its financial house in order is eroding the market's confidence in this pattern. As a result, money could soon be pulled out manufacturing and financial stocks with heavy exposure to Latin America. And lower trading volumes usually means a more volatile market.

Eric Uhlfelder is the author of "Investing in the New Europe," recently published by Bloomberg Press, and is European Editor at Investing Across Borders. For more information, please go to InvestingInEurope.com.