Robeco: Spanish fiscal deficit on track for strong decline

Main market events
Euro periphery bonds fared well in a week that was characterized by a bearish market climate for German Bunds. Spreads for both Italy and Spain tightened by 11bps. The news that Five Star has little interest to participate in any coalition government after the elections supported peripheral bonds, as it reduces chances that they will be in power. Italian bonds have returned 0.83% year-to-date, Spanish bonds 1.35%, Portuguese bonds 0.83% and Irish bonds -0.92%.

Italy
With four weeks to go until the elections (4 March), the race is still very much open. A grand coalition of Forza Italia (Berlusconi) and PD (Renzi) in combination with four smaller parties would be in the lead according to La Repubblica, but even this coalition would be short of the required 316 seats to win majority. A broad centre-right coalition is doing quite well in the polls, but is also still short of a majority. Five star is the largest party in the polls, but MS5 leader Di Maio has stated the party is not willing to participate in any coalition government.

Spain
Leaked text messages from Carles Puigdemont revealed that he basically has given up on the Catalan independence battle. While he downplayed the importance of the messages later, and the battle for independence does not hinge upon him alone, it does illustrate the Catalan independence strive being in dire straits. Monthly fiscal data for Spain show an accumulated fiscal deficit of 2.1% in November. This compares with 3.4% in the same period last year.

Portugal
The Portuguese debt ratio has declined by 4pp in 2017, to 126% GDP. The decline in debt ratio originates from circa 4½% nominal GDP growth and nominal debt rising only modestly. The latest data put Portugal ahead of Italy, where debt to GDP is expected to have declined only 0.6pp in 2017, leaving Italian debt at 132.0% GDP.
While being severely hit during the financial crisis, the Portuguese housing market is already starting to show signs of overheating again. A 10% rise in house prices during 2017 (Q3 data) has lifted house prices to above pre-crisis peaks levels. This week the Portuguese central bank announced guidelines on new loan to value ratios, maximum debt service ratios and maximum loan maturities to contain risk taking.

Robeco Euro Government Bonds
The fund has an overweight position in Spanish government bonds and a small underweight position in Italian bonds. We are positive on Spanish fundamentals, while we remain wary of the political risks in Italy. 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. Currently the fund is 42% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.15%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 2 February, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.

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