Spain's Ibex 35: Banks and Inditex Drive Market Rally

Spain's Ibex 35 index has been on a remarkable rally in recent months, outpacing other major European markets. This article explores the key factors driving this growth, with a focus on the resilience of Spanish banks and the strong performance of Inditex, the parent company of the popular clothing retailer Zara.


Spanish banks have been a significant driver of the Ibex 35's performance. Despite the European Central Bank (ECB) starting its easing cycle, interest rates remain high enough to support the banks' main business of lending. The banks make up almost a third of the Ibex 35 and have benefited from the country's economic resilience. Gross domestic product (GDP) is expected to expand by 2.7% in 2024, compared to the sluggish 0.7% across the wider euro area. This economic growth has translated into improved earnings for Spanish banks, with earnings estimates rising faster than anywhere else in Europe.


Inditex, the owner of the Zara fashion brand, has also played a starring role in the Ibex 35 rally. The company's surging sales have boosted its stock price by 33% this year. Inditex alone has provided 30% of the Ibex's gains, making it a significant contributor to the market's overall performance. The company's strong earnings and dividend payouts have made it an attractive investment for fund managers, with Spain being the second most-preferred equity market in the latest Bank of America Corp. fund manager survey.


Tourism-related companies and utilities have also contributed to the Ibex 35's upward momentum. Clean energy provider Iberdrola SA can take credit for 21% of the Ibex's advance, while airport manager Aena SME SA and airline operator IAG SA have also played significant roles in the rally. Utilities, which act as bond proxies, directly benefit from lower interest rates, providing a further boost to the Ibex 35's performance.


However, there are potential risks and headwinds that could impact the Ibex 35's future performance. A high dependence on banks just as the ECB steps up rate cuts and Inditex failing to keep up its breakneck sales growth next year are possible headwinds. Morgan Stanley analysts have recently downgraded banks to in-line from attractive, noting that Spanish lenders' sensitivity to changes in rates has been understated relative to European peers. Despite these potential challenges, the appetite for Spanish assets remains strong, with the country second only to the UK as the most-preferred equity market in the latest Bank of America Corp. fund manager survey.

In conclusion, Spain's Ibex 35 index has been on a remarkable rally, driven by the resilience of Spanish banks and the strong performance of Inditex. While there are potential headwinds that could impact the market's future performance, the overall outlook remains positive, with investors continuing to show a strong appetite for Spanish assets.