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Bargains to be found amongst Spanish stock rout

Source: Reuters - Sat 13th Feb 2010

Spanish blue-chip stocks have been indiscriminately punished on fears about the country's fiscal health, investors and analysts say, leaving opportunities for bargain hunters.

The country's blue-chip index IBEX has fallen 14% since the start of the year as investors fret about Spain's ability to fund its huge budget deficit, dragging bellwethers like Santander and Telefonica along with it.

Telefonica shares have shed around 16% of their value since the beginning of the year and this has been seen as a buying opportunity by Mark Bon, fund manager at Royal Canada who manages around 500 million pounds in assets.

"That looked oversold," said Bon, who bought Telefonica shares following last week's rout. "It looks good value compared to its European telecom counterparts. It's still got solid franchising in Latin America."

Andrea Williams at Royal London Asset Management agreed that Telefonica did not deserve to be used as a proxy trade for Spain.

Telefonica, around a third of whose revenues come from Spain, is currently trading at 9.82 times 2010 earnings, against a European sector average of 10.43, according to Reuters data.

Another Spanish blue-chip with a relatively low exposure to its domestic market is the eurozone's biggest bank, Santander, down 18% since the beginning of the year.

Investors say the bank, for which Spain accounts for just around one third of profits and loans, has been oversold on fears Spain's sovereign rating could be downgraded and point to its strong 2009 results reported last week.

"Beyond the current overly negative market sentiment, the impact from a sovereign rating downgrade would be marginal," said Arturo de Frias Marques, analyst at Evolution Securities. "Sovereign risk has been grossly exaggerated."

Santander is trading at 8.8 times 2010 earnings, against 20.22 times for Britain's HSBC according to Reuters data.

Ferrovial, the infrastructure giant which bought British airports group BAA, has taken a similar tumble of around 18% since the beginning of the year.

"We believe the ...decline in Ferrovial's share price over the last month is unjustified and consider investors are mis-perceiving the group's activities and debts as focused in Spain," said Robert Crimes, analyst at Credit Suisse.

Around a quarter of core earnings come from Spain and around 80% of its groaning debt pile is non-euro denominated, further reducing its exposure to sovereign woes. However, one fund manager said its 22 billion euro debt pile was reason enough to avoid the stock.

"It's got so much debt associated with it that in an environment where interest rates start moving upwards they're going to feel the pinch," said Schroders fund manager Andrew Lynch, who manages around 2 billion euros in assets.

"I would start looking at the companies that do not have particularly geared balance sheets as places to find things that have been overly punished," he said, mentioning companies such as cash-rich, debt-free retailer Inditex.

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