Look beyond Spain's depressingly high unemployment rate and shrinking economic activity and you're likely to see a country on the mend – with rewarding investment implications.
That might sound hard to believe, given that Spain has been among the most troubled members of the 17-country euro zone in recent years and one of the key battlegrounds of the continuing sovereign-debt crisis.
Its economy has contracted for eight consecutive quarters and austerity measures have driven the unemployment rate above 26 per cent, from 8 per cent in 2007. During the last flareup of the debt crisis, in 2012, the yield on the government 10-year bond surged to 7.5 per cent, raising concerns about insolvency.
But strategists at Pavilion Global Markets can see improvements in the making that should gain the attention of bond-rating agencies. They believe Moody's Investors Service, in particular, is far too pessimistic about Spain and should upgrade the country's debt rating – now just a notch above "junk" or non-investment grade status – when the economic cycle improves.
"Since credit ratings usually lag market prices, we do not tend to pay significant attention to them. In this particular case, however, we believe that the next rating move could be particularly significant, both for Spain and for Europe, as rating upgrades could pave the way to larger real money flows into Spanish assets," the strategists said in a note.
Their optimism springs in part from what they see as structural improvements in the Spanish economy. For example, labour reforms are making the country more competitive and Spain's shrinking current account deficits make it less vulnerable to shocks.
As well, austerity measures will exert less drag on economic activity next year, while corporate loan rates are showing some signs of peaking, ushering in potentially looser financial conditions.
"These structural improvements will probably be reflected in improved ratings at some point," the strategists said.
Already, some investors have begun to position themselves for better days ahead in the euro zone, where other observers have also seen early signs of healing.
The latest fund manager survey from Bank of America found that a net 88 per cent of portfolio managers see the European economy improving within the next 12 months, a nine-year-high confidence level. A net 17 per cent of portfolio managers are overweight the region, a five-year-high in terms of asset allocation levels.
"With the euro zone the most undervalued major market by far, optimism on the region's equities should be sustained," said John Bilton, European investment strategist at Bank of America, in a note.
In the case of Spanish stocks, optimism has delivered only tentative gains so far. The benchmark IBEX 35 index hit a multiyear low in 2012 (yes, lower than the lows seen during the depths of the global financial crisis in 2009).
It has since bounced 47 per cent, but it remains 28 per cent below its 2009 high and 45 per cent below its 2007 high, suggesting that the rebound is still in its early stages.
One easy way to gain exposure to the country is with an exchange-traded fund. The iShares MSCI Spain Capped ETF gives you a basket of 25 stocks, including Banco Santander SA, Telefonica SA and Inditex, better known as the Zara clothing retailer.
Some stocks, including Santander, Telefonica and Banco Bilbao Vizcaya Argentaria SA, also trade on U.S. exchanges as American depositary receipts, making it easy to bet on individual companies as well.
No doubt, Spain's troubles are far from over. But from an investor's perspective, that's what makes the country look attractive right now.