Robeco: Peripheral Europe Update - Brexit

• Brexit hurts periphery 

• General elections in Spain; how will Podemos perform? 

Main market events

Peripheral government bonds spreads widened significantly after the Brexit vote. As a result, peripheral government bonds spreads are at two-year highs. Ireland also saw widening, but to a much lesser extent. Italian bonds have returned 2.29% this year, Portuguese bonds -1.83%, Spanish bonds 3.08% and Irish bonds 2.87%. These returns are as of close Thursday.

Brexit 

A majority of British voters (52%) choose to Leave the EU. The Brexit was broadly unexpected in financial markets since polls and bookmakers pointed to the other direction. Pound sterling versus the dollar declined significantly from 1.50 to 1.38. Italian and Spanish spreads versus Germany widened 30bp today.

Spain

This Sunday Spain will again have its general elections. Podemos, which wants to reverse austerity and reforms, has advanced in the polls. It’s still unclear which coalitions will achieve a majority. Formation might be complicated, just as after the December elections. 

Portugal

Both the European Commission and the ECB mentioned that the economic recovery is surprising to the downside, which poses a risk for Portugal’s fiscal outlook. Both institution expect the budget deficit to come out at around 3% this year, much higher than the target of 2.2%.  

Italy

The opposition party M5S performed very well during last Sunday. It became the largest party in Rome and unexpectedly in Turin. This doesn’t bode well for the ruling party ahead of the October referendum.

Robeco Euro Government Bonds

The Brexit will have ramifications for the peripheral countries, since it will result in a further rise of political risks in Europe and this will likely hamper economic growth. As consensus positioning is overweight in the periphery we remain cautious with respect to the periphery, despite the ECB’s QE program.

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 24% of the fund versus 39% in the benchmark. Year-to-date the fund’s absolute return is 4.13%*.

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* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD June 23, 2016.The value of your investments may fluctuate. Past results are no guarantee of future performance.