Spain's uncertain politics are holding back a stock market that is posting good earnings and is not expensively valued, investors say, and performance may not improve unless next month's election has a clear result.
Spanish equities began to lag European peers before December's inconclusive vote, and have failed to close that gap substantially this year as the country has remained in political limbo, even as growth and earnings figures both look relatively impressive.
Spain's economy was an unlikely star in the first quarter in the euro zone, and underpinned growth in the region to help return to its pre-crisis peak.
The best chance of getting that to feed through to equities, some strategists say, is for voters back a workable coalition of some of Spain's more mainstream parties at a re-run of the elections next month.
"Growth is holding up well for the first half of the year, but some of the business surveys have been a bit softer recently," said Emmanuel Cau, European equity strategist at J. P Morgan.
"If we get some kind of centrist coalition at the June election, that could be quite market-friendly."
There are signs that the economic recovery is filtering down to earnings. Nearly three quarters of the Spanish companies that have reported quarterly earnings so far have met or beaten expectations, Thomson Reuters StarMine data shows.
That metric drops to just 59 percent for an index of top European companies excluding Spain.
"Spain is not expensive, and the earnings momentum has been a bit more resilient than the rest of Europe," said J. P Morgan's Cau, adding domestic sectors such as those focused on local consumption are well-placed to benefit.
Spanish equities trade at 17.2 times forward earnings, a 13 percent discount to the broader European market, according to Thomson Reuters data.
Political uncertainty did not dent growth in the first quarter, with the services sector performing well.
However, there are signs from recent PMI surveys that business sentiment is souring, and polls still show another inconclusive election on June 26 is likely.
And not all who have cut their exposure to Spanish stocks are ready to jump back in until there is a political resolution one way or the other.
Over the past year Spanish stocks have lost nearly 25 percent compared with just under 17 percent for Europe.
There is concern that caution over continued deadlock will also be reflected in higher Spanish government bond yields, raising costs for Spanish banks. Spanish bond prices have already fallen this year, along with peers such as Italy.
Julius Baer, which downgraded Spanish equities to "underweight" in January, is in no rush to change that rating ahead of the next round of elections.
"There are fears in the market that we might have the exact same problems after the elections as we have them already now," said Christoph Riniker, head of strategy research at the Swiss fund management firm.
"Therefore we will stick to our underweight stance for the time being and certainly want to get more clarity first before changing our view."