IBEX 35 stands out in Europe: up more than 3% in May

Increased pessimism in the latest economic forecasts is becoming a widespread view. Current sentiment is evidence that economic growth remains on track, but with some nuances. According to Alberto Matellán, chief economist at MAPFRE Inversión, stock markets “will continue to give us scares” in the coming weeks and even months. This is a reality that has been accepted by investors, but analysts have seen how not all markets are moving in the same direction: the most obvious example is the IBEX 35, which became the best performing index during the month of May, with a rise of over 4% (by way of comparison, the EUROSTOXX 50 ended the fifth month of the year in the red).

The reason? Matellán points out that “the weight of the banking sector (with a 25% presence in the index, it is benefiting from the backdrop of rising interest rates) and major exposure to Latin America (which is increasing its flows due to raw materials and the appreciation of the dollar)” are favoring the Spanish stock market compared to its European counterparts despite the turbulent environment.

Likewise, the scant presence of Spanish companies in Russia and Ukraine or the strong momentum of value companies are adding an additional boost to a Spanish business sector that does not seem to have been affected by the new PMI data for the Eurozone (54.6 points in May, compared to 55.5 in April).

These figures come following a quarterly results campaign that, according to Ismael García Puente, investment manager at MGP, does not seem to have reflected the current reality: “What is lacking is an overall revision of profits and margins to bring them into line with the economic reality of slower growth.”

New macroeconomic data: increased concern?

The good news for the Spanish stock market has been accompanied by other not-so-positive news for the economy: the most recent CPI has resumed its upward trend (8.7%, four tenths more than in April) after starting to show signs of moderation last month. The expected trend was initially downward. However, higher fuel and food prices are again mostly to blame for prices having broken experts' forecasts in both Spain and the Eurozone (8.1%, above the 7.7% expected by analysts). Prior to the latest published data, it appeared unlikely the March peak of 9.8% in Spain would be matched once again, but the situation has changed: talk of transitory or temporary inflation is a thing of the past. However, Matellán believes that prices are now plateauing, “with CPI figures likely to be remain steady at least until September.”

Beyond any debate that may arise around the seasonality of inflation, worries are being deepened by a further factor: the underlying CPI (which discounts unprocessed food and energy products) has been close to 5% in Spain, which are the highest levels since 1995, with more than twelve consecutive months of uninterrupted rises. This situation means that energy costs, disruptions in the supply chain and the war in Ukraine, among others, are already having a direct impact on the economy as a whole. Second round effects, as a result, are painting a picture of a structural crisis in the price system.

The inflationary dynamic has also been accompanied by contractions in French and U.S. GDPs (0.2% and 1.5% in the first quarter, respectively). The idea of a recession, as was being said for the past few weeks, is not plausible, for the moment, even in the case of three consecutive months of declines in Gross Domestic Product, as pointed out by the investment manager of MAPFRE Gestión Patrimonial.

This situation, in a way, could once again force a shift in the monetary policy of central banks to deal with an even more difficult second half of the year. Will they continue on the path of normalization, or will they pull back to prioritize growth? In view of the current state of the economy, the MGP expert recognizes that “some investors already assume that central banks will not be able to go as far as they had said and will have to normalize what they are saying in order to recover growth.”

Along these lines, if the accommodative path is resumed, both the Fed and the ECB could go back to supporting the market via liquidity. In fact, Matellán points out that the latest zigzags (“stronger than expected,” according to the expert) in some indices are the result of an inflow of liquidity due to specific issues in the US fiscal cycle. But he insists that the main concern will continue to be the inflow of money into the markets following seven consecutive weeks of liquidity outflow, leaving an even more unstable outlook.