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Bolsa hits the big time

Foreign funds are reducing their holdings in the relatively expensive Spanish equity market but domestic demand is mopping this up - and more. Falling interest rates, tax concessions on equity holdings and corporate-friendly labour-market reforms have attracted the Spanish away from fixed interest. And some foreigners are finding Madrid a useful proxy for Latin America. Jules Stewart reports.

The Spanish equity market has entered an era of shareholder democracy as domestic investors begin to pile in seeking a higher risk-return profile than they can get from traditional fixed-income investments.

"We were forecasting an influx of Pta585 billion ($4 billion) in new investment in the equity market this year but what we've seen in the first five months has already exceeded our estimate," says Cecilia Planiol, chief economist at Santander Investment. "We are in a situation where for the first time in Spain people feel that low interest rates are here to stay. Hence they are looking for ways to enhance the returns on their investments, and this means switching out of fixed-income instruments into the stock market."

Most analysts agree that the economic environment could hardly be more favourable for the equity market. Short-term interest rates, now at 5.25%, are closing quickly on German levels and the market is convinced they will continue to drop sharply over the coming months. "In the next 12 to 18 months, Spanish short-term rates will have to come down by almost two points to reach convergence with Germany," says Ignacio Gomez Montejo, head of equity research at Merrill Lynch in Madrid.

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