Special Feature
Long Ibex (Spanish equity market) v short the S&P 500 Below is the 3 year chart of the Ibex versus the global benchmark - the S&P 500. You can see that whilst the S&P 500 is presently probing new 3 year highs, the poor old Spanish market has (at time of writing) just revisited its 2009 lows.
This level of dislocation between major markets is very rare. In essence, the US market has outperformed the Spanish market by almost 90% (excluding currency movements) - a phenomenal level of underperformance.revisited its 2009 lows.
Whilst the worries within the Spanish economy are not to be trivialised, with an amazing almost 1- person-in-4 of working age currently unemployed and continued worries within the sovereign debt markets over the ability of Spain to repay its debts, as with most things, the question is now; is it in the price? With Spanish equity yields on their way to 8% and, even with the bond vigilantes pressurising yields, 10 year bonds currently hovering around 6%, unless there is a major wholesale dividend cut around the corner and no real growth in dividends over the next 10 years, it is hard not to come to the conclusion that Spanish equities are cheap.
Analysts at Soc Gen recently opined, “The Ibex either discounts a dividend cut or a further rise in interest rates; or, all signs suggest that Spain is in a similar situation to Japan during its lost decades, with the spectre of deflation rearing its ugly head. Thus, any positive sign from the Spanish economy could lead to normalisation of 10-year bond yields and send the IBEX higher, as recently occurred on Italian financial markets.”
40 | www.financial-spread-betting.com | June 2012
The pairs trade suggestion here is simply long Ibex v short S&P 500 (again remembering to check with your provider if the S&P contract is trade in £’s per whole or tenth of a point). The denomination factor on the short side per £10 is 6800/1360 = 5, i.e. for every £10 long on the Ibex you would short £50 of the S&P 500 (or £5.23 if per tenth of a point).