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Continued from Part 1: Why Spanish equities changed from laggard to leader
Is Spain approaching a bottom in growth?
Equities, like all assets, are priced off of future expectations. This concept can be difficult to understand when a stock price jumps after a company reports losses or when Apple stock craters after reporting record profits. In the case of Spain, real GDP growth (the increase in output holding prices constant) has been negative and accelerating between Q4 2011 and Q4 2012. In the beginning of 2013, Spain printed a -2.0% RGDP growth number. This was followed by a -1.6% print in Q2 2013—a significant deceleration and far below expectations of -1.8%. Before an economy can begin to recover, it has to start worsening slower. It appears as though Spain may be doing just that.
Looking at the individual components of GDP, exports appear to be driving the beat, as Spain exported 9.2% more in Q2 than in 2012. This export growth is a positive for manufacturing companies such as Spanish carmakers. Household consumption continues to fall as well, but again, the -3.1% reading in Q2 is a deceleration from the -4.2% print in Q1. Gross capital formation (the production of fixed assets over the quarter) also decelerated from the lows of Q4 2012 and Q1 2013. Finally, government expenditure has been shrinking for nine straight quarters but is again decelerating from the low hit in Q4 2012.
Things have been going wrong for Spain for a long time, but as the economy nears a bottom, investors begin to price in a recovery. Corporate earnings are levered to GDP, so small changes in GDP growth expectations lead to large changes in earnings expectations, which are the primary driver of stock prices.
© 2013 Market Realist, Inc.