Spain Garners a Bull Call

It was just over a year ago that yields on Spanish 10-year sovereign bonds surged over 7.6 percent. Investors fretted that the "S" in the infamous PIIGS acronym was headed for collapse and a subsequent epic bailout.

Spain, the eurozone's fourth-largest economy, offered little in the way of bullish investment themes, that is unless one enjoys crippled banks and the region's highest rate of joblessness.

Fast-forward to 2013 and it is fair to say the iShares MSCI Spain Index Fund EWP has not been as bad of a performer as many would have predicted at the start of the year. EWP, the lone Spain ETF, is actually slightly higher year-to-date when accounting for Tuesday's gain. With EWP holding up fairly well, at least one investor is cautiously optimistic on Spanish equities.

"I've recently upgraded my view of Spanish stocks to neutral from underweight," said iShares Global Chief Investment Strategist Russ Koesterich in a new note. "While Spain continues to face severe growth headwinds, there are three main reasons why I'm less concerned about the market now."

While acknowledging the low base, Koesterich says Spanish corporate profits are poised to recover after the government there forced a tidying of the banking and real estate sectors. That is important to investors considering EWP because the ETF allocates almost 41 percent of its weight to financial services names, nearly triple the next largest sector weight which is utilities.

"While the Spanish economy will likely continue to struggle this year and into next, most of the bad economic news is now priced into current valuations," said Koesterich in the note. "This is thanks to Spanish stocks' massive underperformance in recent years. Since I initiated my underweight call on Spain at the end of 2011, Spanish stocks have underperformed other developed markets by around 20%."

EWP currently has P/E ratio just under 18 compared to the iShares MSCI Germany Index Fund EWG, which has a P/E of 20.5, according to iShares data. The iShares MSCI EMU Index Fund EZU has a P/E of nearly 22.

While noting Spain's risks have been lowered thanks to the European Central Bank's asset purchase proposal, Koesterich did say the Spanish investment thesis is not risk-free.

"Spanish stocks aren't without their risks. One potential roadblock on the horizon for both Spanish and European stocks: An upcoming ruling from the German constitutional court on the legality of the ECB's proposed asset purchase program," he said.

Additionally, Standard & Poor's recently said it expects Spain's unemployment rate to remain high and Spanish bond yields have started creeping higher again. Spanish 10-years currently yield almost 4.6 percent, up from around four percent in early May.

"However, Europe has one distinct advantage to domestic equities: market watchers' low expectations. In the current environment, even modest signs of good news can have a positive impact on European equities in general and on Spanish stocks," said Koesterich.

EWP has $307.6 million in assets under management and a trailing 12-month yield of 4.61 percent.

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