Why Spain outperforms other developed markets (Part 7 of 8)
Recovery and Spanish stocks
The problem with relying on economic data to make investment decisions is that most indicators are coincidental and lag stock prices significantly. By the time Spain’s economy fully recovers, Spanish stocks will have completely rebounded and any excess returns will have already been realized.
In order to be forward-looking, investors should place more weight on changes in fiscal and monetary policy, which set the stage for economic growth. Spain, like the rest of Europe, is going through a period of significant austerity. We can see this in government expenditures, which have been shrinking for nine straight quarters. This is bullish for the economy in the long term because it will lead to lower debt levels and budget deficits.
Monetary policy in Europe has been difficult to watch over the last five years. By raising interest rates in 2011, the ECB (European Central Bank) caused a double-dip recession that has kept southern Europe mired in record unemployment. The best thing we can say here is that monetary policy is stabilizing. However, another premature rate hike would be an immediate sell signal, as it would likely abort the current rally.
Browse this series on Market Realist:
- Part 1 - Why Spanish equities changed from laggard to leader
- Part 2 - Why Spain’s gross domestic product growth could signal a bottom
- Part 3 - Must-know: Unemployment is finally coming down in Spain
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