Some global asset managers have reacted to the change of government in Spain after its former president Mariano Rajoy was ousted from office by the Socialist Party’s PSOE no-confidence motion last week.
Spanish MPs voted on 1 of June to dismiss Mariano Rajoy’s PP in a vote of no confidence, turning PSOE’s Pedro Sánchez into the new president of Spain.
Fidelity International’s Andrea Iannelli, investment director, fixed income, said: “Looking ahead, despite the changes at the helm, there is very little that the new Spanish government can actually do. The government that Sánchez now leads has a very slim majority in Parliament, and relies on the support from parties with very different political agendas. The room for manoeuvre on the fiscal side is also limited, with the 2018 budget already ratified by Rajoy before his departure. As it stands, in the short term it is difficult to see how long the new government will hold, and early elections appear likely in the months ahead.
“Despite political uncertainty, investors will likely approach Spain differently from Italy for two reasons.
“Firstly, in Spain there is much more support for Europe across the political spectrum and among the population, which should prevent a replay of the sparring and anti-Euro headlines that weighed on Italian assets in May. Secondly, Spain is in a stronger position, both on the economic and fiscal front. The country implemented structural reforms, benefits from a structurally higher level of growth and has a lower debt to GDP ratio than its Italian counterparts.
“These factors should lead Spanish bonds to remain well supported and outperform BTPs in the near term.”
However, Iannelli warned investors that Spain should not be considered as completely immune to volatility and external factors. “As we saw in the last week of May, Spanish assets can be heavily driven by the broader risk sentiment around peripheral debt. Should the Italian situation escalate again, and BTP yields rise, Spanish bonds are likely to follow suit, with correlations between the two markets likely to remain elevated in the months ahead.”
Seema Shah, global investment strategist at Principal Global Investors, also reckoned the political situation in Spain was completely different to that in Italy.
“Spanish risks are simply incomparable to Italy’s political turmoil of the past week. Much of the market panic around Italy was about the threat to its membership of the Euro area but, by contrast, all of the main Spanish political parties are supportive of the single currency. Presuming Sánchez does not try to hang on to power, Spain is likely to see new elections later this year and a market-friendly, pro-European government should materialise from there. In the meantime, given that the support of Basque nationalist MPs required a promise to not change the budget, Sánchez is unlikely to make sweeping changes to the budget.
“Material economic progress has been made in recent years – Spain’s fiscal position has improved; unemployment has fallen; and the banking system has been strengthened – the latest political disruption does not upset the generally positive outlook for the Spanish economy. Of course, political uncertainty is never welcome, but it has been telling that Spanish bond yields have fallen again today. It seems that Italian politics are more important for Spanish markets than Spanish politics.”
Julien-Pierre Nouen, chief economist at Lazard Frères Gestion also believes the macro environment in Spain is much better than in Italy – with high economic confidence, growth forecasts at around 3% and unemployment rates falling rapidly – but fears Italian political turmoil can affect Spain. “It is expected that the Spanish budget deficit will reach 2.5% in 2018 and the debt / GDP ratio has started to fall, so if the growth remains at the current level, the risk of the Spanish debt upgrade too,” he added.
According Nouen, Italy’s current situation is affecting the Spanish debt market. If the concerns about a possible exit from Italy of the eurozone increase a lot, there could be some contagion and the Spanish debt could be under pressure, but in such a scenario, the ECB could be tempted to delay the decrease in purchases after September. In addition, as long as the political consensus to remain in the euro remains solid, if spreads expand, they could provide a buying opportunity.
“In equity markets, as long as the Italian situation is not sorted out, the markets should remain volatile and we can attend times of panic. However, the economic context remains positive, with good global economic growth, which, in turn, supports the growth of earnings per share. The problem is that during these crises the market does not pay attention to this health, but if the fear recedes, the bags should bounce.”
Eight political parties in parliament backed the no-confidence vote (180 members), while four voted against it (169 members) and one regional party abstained.
The no-confidence motion, the first successful in 40 years of democracy in Spain, followed a court sentence from last week, in which one of PP’s former treasurers was jailed for 33 years for fraud and money laundering, as well as the political party PP itself was fined for benefiting institutionally from kickbacks for public contracts in the Gürtel affair.
Former president Rajoy had also testified in the case, in which 29 defendants were found guilty and sentenced jail.
Currently in the opposition, the PP remains the largest single party, with 134 seats of the 350-strong Congress of Deputies, while the new president Pedro Sánchez from the Socialist Party PSOE has only 84 seats. Sánchez will be supported by seven other left and regional parties in key votes.