MADRID (Reuters) - With Spain languishing in what many economists consider will be a prolonged recession, its rich have returned to buying shares, encouraged by a decoupling of the stock market from the real economy.
The eurozone’s No.4 economy is expected to be the last in the region to emerge from recession after an international financial crisis hit the key pillars of construction and consumer demand, exposing the country’s structural frailties.
From October 2008 to early March 2009, when global markets seemed to be in free fall, many of Spain’s second biggest bank BBVA’s private clients preferred to cut their losses and switch to cash.
But now recovering equity markets are emerging as a good option, with interest rates at record lows, even if the real economy offers plenty of reason for concern.
“When the Spanish stock market touched bottom early March, leaving many companies trading at prices way below their book value, we began to see renewed buying interest,” said BBVA’s Head of Private Banking for Spain Alfonso Gomez.
Spain’s IBEX stock index has risen 64 percent since March 9, outpacing a 40 percent rise in the broader European market.
Favorable tax treatment for the wealthy’s investment vehicles, known as SICAVS, is also likely to ensure continued equity investment.
These funds manage about 27 billion euros in assets and the government has indicated that SICAVs may not be included in planned tax reforms.
Spain’s largest bank Santander’s specialized private banking unit is also recommending clients get out of government bonds and invest in corporate bonds, which offer better yields.
“These investors are prepared to take a little more of a risk now and I think this trend will continue in the coming months,” said Luis Moreno, Business Development Manager at Santander Private Banking.
The Spanish wealth market has expanded strongly in the last few years and its composition is now very different from the early 1990s when the country last faced a steep economic downturn.
At that time, inherited wealth accounted for 75 percent of the market and the other 25 was attributed to entrepreneurship.
Now the situation is reversed as a result of the wealth created by Spain’s property boom which fueled over a decade of robust economic growth.
While the portfolios of these new rich were hit by the subsequent property bust, the majority have managed to ride the storm unlike most of Spain’s real estate companies and developers, many of which have gone to the wall.
“Wealthy families don’t buy property to speculate. They invest in the best assets in prime locations with a long-term horizon,” Moreno said.
One of Spain’s top 10 rich list, with a fortune slated at around $18 billion, is clothing retailer Inditex founder Amancio Ortega, a railway worker’s son who started his business in the 1960s making dressing gowns in a garage in La Coruna, northern Spain.
Inditex has held up better than counterparts across the world as consumers have tightened their belts amid the downturn thanks to its focus on selling catwalk styles at knockdown prices.
Prime foreign property assets are on the wealthy’s buy list as a way of diversifying risk and obtaining higher yields, while, most importantly, preserving their capital.
The “massive correction” in the London property market, both in residential and office prices, is fuelling wealthy Spanish investors’ interest, Gomez said.
“The pound/euro exchange rate also provides an additional yield,” he noted.
Since the financial crisis began, the pound has dropped over 20 percent against the euro, helping those with deep pockets to take advantage of real estate bargains in certain prime London locations.
“Rich people are always attracted to bricks and mortar,” Gomez said, but said some private banking clients are also investing in property in central Madrid with a 7-10 year horizon.
Editing by Sitaraman Shankar