Spain, suffering from the highest unemployment rate in Europe, is producing the best stock returns among countries in the region with shrinking economies as sales to Latin America grow.

The IBEX 35 rose 17 percent in the past year, the steepest advance in any euro-region economy that is still contracting, data compiled by Bloomberg show. Spain’s benchmark index beat Europe’s Dow Jones Stoxx 600 Index by 15 percentage points in the same period as Madrid-based Telefonica SA, Europe’s second- largest phone company, and Banco Santander SA, the country’s biggest bank, benefited from Brazil’s growth.

While Spain’s economy is projected to contract by 0.7 percent, IBEX members receive about 40 percent of earnings from Latin America, with 15 to 20 percent from Brazil, where the economy grew 1.9 percent in the second quarter, according to estimates by Bilbao-based Banco Bilbao Vizcaya Argentaria SA. Santander and Telefonica, which account for 45 percent of the index’s weighting, get more than 34 percent of their operating income from the region, data compiled by Bloomberg show.

“For companies that make a lot of sales there, the potential is certain,” said Kilian de Kertanguy, a fund manager at Cholet-Dupont Gestion SA, which oversees about $2.3 billion and shares of Telefonica and BBVA, Spain’s second-biggest lender. “These big companies exposed to Brazil can have a contagious effect and lift the index. As a result, the whole market benefits.”

The IBEX 35 slipped 0.5 percent at 11 a.m. in Madrid, while the Stoxx 600 dropped 0.8 percent.

Latin America

Spanish companies invested 125 billion euros ($185 billion) in Latin America since 1993, a third of which went to Brazil.

Earnings from Latin America may encourage investors to buy Spanish stocks as an alternative to emerging markets, according to Bob Parker, who helps manage about $600 billion as vice chairman of Credit Suisse Asset Management in London.

“If you ask which European country is most exposed to Latin America, it’s Spain,” said Parker. Investors who believe “emerging markets have climbed too far, too fast” can switch into Spanish equities with lower valuations, he said.

Brazil’s Bovespa index is up 70 percent this year, pushing its valuation to 25.5 times reported earnings. Spain’s IBEX 35 is valued at 12.5 times profits. Itau Unibanco Holding SA in Sao Paulo, Latin America’s largest bank by market value, trades at 3.3 times net assets, more than double the 1.3 price-to-book ratio for Santander.

via Spain Stocks Top Europe With 40% Latin America Profit (Update1) – Bloomberg.com.