Buy Spain! And don’t sell Italy.

Let’s continue on yesterday’s line of reasoning against fear on Grexit yes or no.

In Alphaville’s Long Room interaction space, this is the most popular post now:

Go long Europe risk

Posted by NothingButValue on May 15 22:14.

European stocks are trading at extremely attractive historical valuations.  Assuming you’re an investor with a longer time horizon (say 5-10 years) and you can ignore continued volatility, Europe is now a strong buy.  Let’s take three large markets:

  1. Italy: the market capitalization of equities/GDP (one of Buffett’s favorite metrics for the US equity market) is roughly 22%.  Recent (last 10-15 years) normalized average is around 40%.  That’s 85% upside.  This measure in Italy has bottom roughly at 15% historically.  So you’ve got 31% downside.  That’s 2.8 upside/downside, a great risk/reward.
  2. France: mktcap/GDP of 45% vs. average of 77%, for 42% upside.  Historical downside is 17%.
  3. Spain: mktcap/GDP of 33% vs. average of 83%, for 155% upside.  Historical downside is 14%.  Spain is clearly priced for a depression.  When the unemployment rate in a country gets close to 25% (i.e. Great Depression levels), pretty much everything bad is already known.

Sure, everything can get worse for a while.  Europe may even break up.  That won’t reduce the long term fundamental earning power of the companies making up these indexes, be that in euros, marks, or liras.  They will adjust, and rebound.  At these valuations, a huge amount of bad news is already priced in.

So, while upside/downside are around 2.5 in Italy and France, it’s worth 11 in Spain. BUY SPAIN is a safe suggestion. Besides keeping in mind the Sovereign Crisis rule no-1: for some time in the past and the near future, in general shares are safer and increasing value more than bonds. But Spain shares do it better!

Published in: on May 17, 2012 at 9:49 am  Leave a Comment  
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