Robeco: Polls UK referendum point to Brexit

The main theme for this week was the UK referendum. Since the Leave camp is currently in the lead according to the polls, the market was in risk-off mode.

20.06.2016 | 10:04 Uhr

This caused a sharp spread widening of peripheral bonds. Italian and Spanish bonds lag German bonds by 2.5% this month. Italian bonds have returned 1.35% this year, Portuguese bonds -3.49%, Spanish bonds 2.22% and Irish bonds 2.05%.

UK referendum
This week’s polls show an advantage for the Leave camp. Even the polls that showed earlier a clear lead for Remain, have turned to Leave. Bookmakers still show an advantage for Remain, although that chance has decreased from 70 to 60%. The referendum will be held next Thursday, with the final result available at Friday morning 9:00.

In this week’s television debate, PSOE and C’s mentioned that they will not support a government with Rajoy (PP) as Prime Minister. Latest polls in Spain show that the combination Podemos/United Left is advancing and closing in on Partido Popular (PP). Still government formation will likely be problematic. The Spanish elections are scheduled for Sunday, June 26.

Rating agency Moody’s mentioned that it could downgrade Portugal (currently Ba1 = BB+) if they fail to commit to fiscal consolidation. Moody’s is particularly worried since economic growth has disappointed this year. Also Moody’s pointed to the remaining risks in the banking sector.

This Sunday the second round of the municipal elections will be organized. The outcome will provide color if the referendum later this year will get enough support for the Renzi government.

Robeco Euro Government Bonds
We continue to see the ECB’s QE program as supportive for peripheral debt, but political risks are rising in Europe and growth is no longer improving. As consensus positioning is overweight in the periphery we have become more cautious with respect to the periphery. 

Since peripheral spreads increased significantly this week, the fund took profit and reduced the underweight position in both Spain and Italy. Our view remains unchanged.  The evolving political risks and the lack of fiscal reform makes the periphery vulnerable. We don’t hold any short dated bonds of Italy and Spain due to unattractive valuations. We have an underweight position in 10 year Italy and Spain. Peripheral bonds make up 23% of the fund versus 39% in the benchmark. Year-to-date the fund’s absolute return is 4.44%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD June 16, 2016.The value of your investments may fluctuate. Past results are no guarantee of future performance.


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