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Investing in Spain and the Rise of the New Conquistadors
As a country that freed itself from the yoke of fascist dictatorship only 30 years ago, Spain may be the most underrated economic success story on the planet. Since then, this country of only 41 million people -- about the size of California -- has become the world's second most popular tourist destination, the world's sixth-largest car manufacturer, and the eighth-biggest economy in the developed world. And with the economy expanding 40% over just the last decade, investing in Spain also has been a good bet. The Spanish market has outperformed the S&P by more than 5 to 1 during the past five years. 
We Americans owe a particular debt to Spain. After all, financing by venture capitalist Spanish monarchs Ferdinand and Isabella led Italian entrepreneur Christopher Columbus to discover America in 1492. Over the next century Spain emerged as Europe's greatest power -- thanks in large part to the Google-like returns that the discovery of America yielded. But after a glorious 16th century, Spain's empire went into a slow decline. Modern Spain was born with the death of dictator General Franco in 1975 -- which led to the re-establishment of parliamentary democracy and a new constitution three years later. By 1986, Spain already was a member of the European Community. The country hasn't looked back since. Investing in Spain's Economic Boom As one of Europe's best-performing economies, Spain's "siesta-and-fiesta" reputation is long outdated. Indeed, Spain's economic performance has matched that of the United States -- expanding at 3.6% a year during the past decade. Contrast that growth with Germany -- which averaged 1.4% annual growth during the same period -- and you see why Spain has been the job creation champion of the European Union.
Spain's example shows that economic policy matters. Madrid began deregulating key sectors -- such as telecommunications, banking and energy -- sooner than laggards France and Germany. This policy helped to jump start economic growth and exposed Spanish companies to foreign competition. Here's an irony: even the current socialist government has plans to cut corporate tax by five points to 30% during the next few years.
But mention Spain at a cocktail party in London or Berlin, and talk will quickly turn to real estate. Indeed, Spain has participated wholeheartedly in the global real estate boom during the past decade. Last year alone, 715,000 units were built in Spain. That's more than triple the number built in Britain, which has a population one-third bigger than Spain's. First-time buyers from Madrid have been forced 25 miles out of the capital by prices that have more than doubled since 1997. Cassandras warn that Spain's long-running economic boom is fraying at the edges. The asking prices for apartments along Spain's Costa Del Sol are plummeting -- South Florida style. Investment bank Goldman Sachs estimates that housing may be overvalued by as much as 25-35%. A burst of the global housing bubble would hit Spain particularly hard: the construction sector alone accounts for 16% of GDP and 12% of employment. Nudging up near 4%, inflation is 1.5% above the average for the Euro area. Spain also boasts one of the world's biggest current-account deficits -- well over 7.5% of GDP. And competition from China and Eastern Europe already is eating away at the Spanish advantage. Some automobile manufacturers simply have pulled up stakes and left.
The optimists expect an ever elusive "soft landing." Inflation may eat away at competitiveness, but immigrants have kept wages down. Another 650,000 immigrants arrived just last year. And GDP growth is expected to slow to about 2.5% in 2007 -- tepid by global standards, but average for Euroland.
The Rise of the Spanish Conquistadors Investing in Spain is a bet that may get even better. After 40 years of economic and political isolation under Franco, the Spanish companies have gone global quickly. Indeed, Spain's globetrotting businessmen have been dubbed the "new conquistadors" -- heirs to Spanish conquerors such as Hernando Cortés.
Today's Spanish conquistadors don business suits and run companies such as Santander, Telefonica and Ferrovial. Santander already is the biggest bank in continental Europe; Telefónica, the third-biggest telecommunications company in the world; and Spanish companies such as Ferrovial comprise five of the top seven European construction groups.
The new conquistadors are nothing if not systematic. Their push into Latin America a decade ago gave them their first international experience. Telefónica, along with banks and utilities, snapped up assets all across Latin America during a wave of privatizations. But with privatizations drying up, and the recent rise of populist governments in Latin America, Spain's conquistadors have been forced to conquer new markets. Today, the conquistadors' battleground of choice is Europe. Santander pulled off Europe's second-largest, cross-border banking deal with its $18 billion purchase of U.K.-based Abbey National two years ago. Telefónica bought U.K. mobile-operator O2 for $30 billion, as well as the former state-owned phone company based in the Czech Republic. In addition, Telefónica even grabbed a 10% stake in China Netcom. Ferrovial bought the operator of Britain's Heathrow Airport this year for $19 billion. These are very big numbers -- even by Uncle Sam's standards.
In the future, the conquistadors' attention may shift to the United States. The conquistadors already are tiptoeing back into the U.S. Last year, Santander spent $3.5 billion for a 25% stake in Philadelphia-area lender Sovereign Bancorp. Just this week, it announced the $650 million purchase of Drive Financial, an auto-finance company in Dallas. Spanish banking rival BBVA already is the largest bank in Texas. And Ferrovial operates toll roads in the U.S Midwest. This activity only will increase. The Spanish conquistadors are back. Sincerely,
Nicholas A. Vardy
Editor, The Global Guru P.S. While CNBC endlessly debates the merits of Amazon versus eBay, it ignores the mega trends that are shaping tomorrow's world. Investing in Spain is just such a trend. My Global Bull Market Alert subscribers generate double- and even triple-digit percentage profits in a matter of weeks -- as I reveal the secret trends the mainstream media ignore. Don't miss out. Sign up for your free 60-day trial today.
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