Buy Spain as political risk is 'overstated' - Credit Suisse

Spanish equities look unusually cheap, said Credit Suisse on Tuesday, as political risk is "overstated" and the country is on track for at least 3% growth, with employment, housing and construction all on a growth tear.

On a 12-month forward p/e ratio Spanish stocks are oversold relative to continental peers as well as on normalised earnings, with Aena, BBVA, Bankia and Caixabank selecting top picks.

Furthermore, Spain's Brazilian exposure, with 20% of Spanish revenues deriving from Latin America, has "significantly underperformed" the euro-real exchange rate.

"Spain is a play on European banks," the Swiss bank said, generally liking European retail banks and with an 'overweight' rating on the wider sector.

"We like Spanish banks in particular for the following reasons: i) Spain has a fast recovering economy; ii) Spanish banks are mainly retail banks (for 6 years we have been overweight retail banks relative to other banks); iii) Spain is the only country apart from Ireland where the front book is above back book for mortgage NIMs; iv) Spanish banks are unusually sensitive to rising rates; and v) Spanish banks are not expensive relative to their peers," wrote analyst Andrew Garthwaite.

Garthwaite and the Global Equity Strategy desk also like that recent soft data is consistent with 3-3.5% GDP, driven by employment growth which is near an eight-year high, with Spanish housing and construction activity recovering strongly.

Spain tends to outperform if the euro strengthens, the analysts noted, which was relevant as the team is bullish on the euro over the long term.

"The political risk is overstated, we think," the analysts said.

"In our opinion, the crisis is unlikely to escalate further and will result in a compromise (e.g. more autonomy for Catalonia, which will remain a part of Spain). Furthermore, we believe markets almost always overreact to political events."

The highlighted top picks were all given an 'overweight' rating as they have underperformed their European peers and the Spanish market since the flare up of the Catalonian crisis, have positive earnings momentum and are not 'underweight' rated by CS analysts.