The recent troubles in Catalonia are set to have a knock-on effect on European equities according to the chief executive of deVere Group.
The immediate market reaction to the illegal separatist referendum in Catalonia is likely to be muted – but what happens on the aftermath will be crucial, according to Nigel Green, the founder and CEO of deVere Group.
As the world watched, Spanish police in riot gear moved in to prevent the ballot called by Catalonia’s regional government, but which Spain’s Constitutional Court banned from taking place.
“What is striking is how this chaos in Catalonia has been largely ignored to date by global investors, who last week appeared more preoccupied with Trump’s proposed tax cuts and Angela Merkel’s reduced political strength in the Reichstag,” said Green, pictured left.
The Spanish stock market is relatively small, Green points, with the country representing just five per cent of the MSCI Europe index, compared to 28 per cent for the UK, 15 per cent for France and 14 per cent for Germany.
“Whilst it is a huge existential crisis for Spain and is a big geopolitical event, regional tensions such as these, rarely have the necessary might to considerably affect global trading,” said Green. “International commerce is stronger than all the sabre-rattling.
Green believes that it is unlikely that there will be immediate major portfolio rebalancing as a direct response to the events in Catalonia, but posts that what happens next will be “crucial” for global investors.
‘Genie out of the bottle’
“Neither Barcelona nor Madrid will back down on this issue,” added Green. “And now the genie of illegality is out of the bottle, there is little incentive for those supporting independence to put it back. Particularly if they can claim a majority of voters back their cause.
“Should the Catalans take further illegal action after the vote, and perhaps encourage civil disobedience, the uncertainty would create significant volatility and the outlook for the EU region’s economy would darken and for Spain also.”
Green concluded that the Catalan separatists’ ongoing campaign would also likely trigger a major destabilising effect as it would encourage other areas to vote for independence from the EU, leaving the Euro under “considerable pressure”.
“Despite global financial markets largely shrugging off the events in Catalonia so far, it is important that investors keep their eyes on all major political events, including this one as how it plays out in the aftermath will be what matters.
“Investors must remain fully diversified across asset classes, sectors and regions, in order to safeguard and maximise their portfolios and to ensure they remain on track to achieve their long-term financial objectives,” he said.