Robeco: Spain - tensions will not harm the Spanish fundamentals

Main market events

Italian bonds have returned -0.25% this year, Spanish bonds 0.01%, Portuguese bonds 10.18% and Irish bonds 0.29%.

Spain

The Catalan Premier Puigdemont held back from an imminent declaration of independence. He claimed the referendum gives him the mandate for such a declaration, but he deferred this and called for negotiations. Not only his own camp was disappointed, especially the most extreme factions, but also Prime Minister Rajoy refused his proposal to enter negotiations. He gave the separatist Puigdemont five days to clarify his statement. If the declaration of independence is confirmed by 19 October, Article 155 will be triggered. Under this scenario, Madrid can suspend the autonomy of Catalonia, take control of all Catalan institutions – including the police force and call regional elections for a new government. 

Italy

The new electoral law was approved in the Lower House via a secret ballot. To finally approve the bill, a vote by the Upper House is needed, which can may be held by the end of the month. This could be positive for Italian spreads as the bill will reduce the chance of M5S winning the largest share of the vote in the general election next year. Meanwhile, the new electoral law may not be enough to grant the absolute majority to a single party. We may therefore expect a coalition government and therefore complex negotiations in the aftermath of the election. 

Portugal 

Portugal spread have tightened after the European Commission gave its green light for the sale of Novo Banco to US equity fund Lone Star. Under the agreement, the contribution of the government will be limited to specific circumstances. A bailout will only occur if Lone Star or other market participants are not able to provide fresh capital under stressed conditions. 

Robeco Euro Government Bonds

We have maintained the underweight position in Italian government bonds as fundamentals remain weak and political risk is still high. The market also has to adjust to the gradual phasing out of the ECB’s bond buying program. We increased the overweight position in Spanish bonds before the speech by the Catalan Prime Minister. Spreads have widened due to the conflict between Catalonia and the central government, but we remain confident that current tensions will not harm the strong Spanish fundamentals. Currently the fund is 41% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is -0.32%⁽*⁾. (* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, October 12, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.)