Brave traders may fancy a contrarian position on Spain

THE Ibex 35 has become a whipping boy for traders to take out their Eurozone angst. Since the onset of the financial crisis, over 50 per cent has been wiped off its value. In 2012 alone, the Spanish index has shed 10 per cent. Against a backdrop of a meagre economy, going long on Ibex is risky. But there may be a case to ignore the negativity, and be bullish on the Ibex.

Spain’s poor position is well-known. Its government recently outlined the fourth austerity budget in Prime Minister Mariano Rajoy’s nine months in office. Stress tests on Spanish banks also revealed an undercapitalisation of €60bn (£48bn). And there are concerns that this figure understates the problem. Michael Hewson of CMC markets asks: “How can €170bn of bad loans on the books of Spanish banks be squared with only €60bn?”

It was, according to deputy prime minister Soraya Saenz de Santamaria “a crisis budget, designed to exit the crisis”. A total of 43 new laws are to be introduced to improve the structure and competitiveness of the Spanish economy, along with tax hikes and budget cuts. Significantly, Spain will also create an independent budgetary oversight body. Despite the fact that a bailout would negatively reflect on Spain’s fundamental position, it could mark the starting point of a recovery rally in the Ibex.

But a key question remains: when will Spain request a bailout?  Many believe that it will only come when economic data deteriorates further. However, some still doubt whether Spain needs a bailout at all. Germany’s finance minister Wolfgang Schaeuble has commented that “Spain needs no programme because it is doing the right thing”.

Angus Campbell of London Capital Group says that a bailout will pave the way for the European Central Bank to buy bonds, reducing Spain’s cost of borrowing and “giving them more breathing space”. Strong conditions will be attached to the programme and some in Spain are concerned that this will result in a loss of sovereignty over economic affairs. However, that is exactly the direction Spain seems to be taking.

Both the budget and stress tests were largely a box-ticking exercise, putting a bailout roadmap in place. They are an affectation, propagating an illusion that Spain is not giving away sovereignty, essentially to appease nationalistic sentiments within Spain. But make no mistake, “the ECB has got its grubby mitts all over this,” says Hewson.

From a technical perspective, the Ibex has formed double-bottom pattern, suggesting a trend reversal. The index broke through its 200-day moving average in September – a bullish signal. The 200-day moving average is also flattening, supporting the idea of a trend reversal.

Campbell thinks that there may be opportunity for moves higher “if the index finds support at the 200-day moving average”. In this scenario, the next opportunity to make a long entry would be a break of 8,400, with a target between 9,000 and 9,500, Hewson says.

Taking a long position on the Ibex is not for the faint-hearted. There are many reasons why investors should be cautious in the medium-term: Spain’s unemployment is still high and recent manufacturing surveys add to the gloom. A bullish position requires a firm belief that Spain will make a bailout request which markets will welcome.

But, as Campbell says, “it takes a brave person to take a contrarian position. But when it pays off, it pays off in spades.”