The Pain in Spain

Index earnings for the Ibex have peaked out in quite a large way following the Lehman implosion and have not come close to recovering, hence the Hussman Peak PER is very depressed currently (5.1x as of market close Fri 13th July). That is a pretty stark contrast with the SPX where at the index level earnings staged an impressive post-Lehman recovery... and at the index-level at least the US large cap space seems pretty fairly valued.

On a Hussman basis the Ibex is trading 2 standard deviations below its 20-year average, which is pretty phenomenal. Even if things go pretty shoddy for the Iberians one would imagine that there will be some kind of multiple expansion over the coming three years to at least take the market to even one standard deviation below its twenty year average. I.e. a still undemanding 10x peak earnings. Assuming some kind of recovery in earnings - even be it because things simply go to rubbish from god awful - that would imply some potential upside.

At 9.6x the Ibex's TTM PER is higher than the Hussman PER but still flags a market trading at very depressed earnings: about 42% off its twenty year average multiple. (The collapse in earnings back in 2003 kinda distorts the average and standard deviation measures, so I have chosen to go with the median value over the period instead.)

Given how shot-to-pieces earnings are currently in Spain, PBR may be a better way of looking through the prism. Again, things look cheap: 0.8x... although the riposte to all this is how much is the book value of the banks, industrials and real estate plays need to be written off by. Eyeballing the heat map suggests these guys have already taken a fair pounding, although they do continue to make up a good chunk of the index. Still at two standard deviations below the long-term average of 2.4x I would say quite a lot of write-downs look baked into the price right now.

Now clearly this market is not nearly as cheap as Greece but 5x peak earnings is still pretty reasonable (even if it may take a long time for the market to get back to topping peak earnings, although a dose of hyperinflation assuming the Iberians get booted out/leave the Euro could get them there quicker).

Source: CapIQ