Robeco: Catalan pro-independence parties moderate there positions

Main market events

Peripheral bond spreads widened moderately on Tuesday and Wednesday in a broad risk-off environment, but recovered towards the end of the week. For the week as a whole, bond returns were roughly in line with those on German bonds. Italian bonds have returned 1.78% this year, Spanish bonds 1.04%, Portuguese bonds 12.81% and Irish bonds 0.94%.

Spain

The main Catalan pro-independence parties seem to be moderating their stance ahead of the regional elections that will take place on 21 December. Puigdemont, the ousted Catalan Premier and leader of the PDeCAT, said in an interview that he has always been open to an alternative for independence. The ERC party, which called for independence within 18 months in the previous regional election campaign (2015), now says there is no set date for such decisions.

Portugal

GDP grew by 0.5% in the third quarter, somewhat less than expected but sufficient to keep growth at 2.5% compared to the same quarter last year. This strong growth and low interest rates help to reduce the budget deficit, while also creating room for the government to loosen some of the caps on public hiring and wages. The 2018 budget targets a deficit of 1%. Finance Minister Centeno expects debt/GDP to decline from 130% in 2016 to 126% this year and 123% in 2018. He argued this decline is necessary to be prepared for eventually rising yields.

Italy

The Italian economy also grew by 0.5% in the third quarter, bringing growth to 1.8% over the last year. This is the strongest growth seen in Italy since early 2011, but still below the Eurozone average. The Italian debt/GDP ratio has risen to 135.5% in the third quarter.

Opinion polls show that the governing PD party lost support after its weak result in the regional elections in Sicily, while the 5-Star movement gained support and remains the biggest party.

Robeco Euro Government Bonds

We have bought some Portuguese government bonds, anticipating a potential rating upgrade to investment grade. We have reduced our position in Italy slightly to keep our overall peripheral exposure constant. We have an overweight position in Spain and a small underweight position in Italian government bonds. We remain wary of the political risks in Italy, but for now the ongoing ECB buying and the improving economic backdrop support all peripheral bonds. We hold no Irish bonds as their spreads over France do not compensate for the potential risks stemming from Brexit, international tax reform and the volatility inherent to Ireland’s size.

On net, the fund remains overweight peripheral bonds, concentrated in Spain. Currently the fund is 42% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is 0.52%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, November 16, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.