Spain has just held its third general election in less than three and a half years. While the governing Socialist party won the most seats, once again no party has gained a majority, and ultimately we may see various political groups with very different outlooks trying to find a means to work together in the coming months.
Tricky Road Ahead
Any potential coalition would create initial uncertainty for investors until it becomes clear which areas parties would be willing to compromise on in order to work together. Continuing electoral dissatisfaction created two of the newest parties, the far-left Podemos and more liberal Ciudadanos, but they have failed to make a meaningful difference, and now far-right party Vox has joined the fight, winning 24 seats. More broadly, we expect the kind of electoral dissatisfaction seen in Spain to continue as a global trend, with centrists and especially established parties losing out to newcomers promising the electorate what they want.
As far as Spain is concerned, implications for the bond market could stem from the tendency of populist parties to promise the electorate easier fiscal policies which can lead to higher budget deficits. Additionally, repercussions could stem from parties’ inability to deliver enough fiscal easing to satisfy elements of the electorate, which subsequently leads to the creation of even more far-left and far-right populist parties as we have seen with Vox.
The continual increase in the number of parties dilutes the overall vote, which results in coalition governments that have limited ability to effect any meaningful change. Of course, this is not just a problem in Spain. Last year’s Italian general election and economic concessions squeezed from French President Emmanuel Macron under pressure from the ‘gilets jaunes’ protests are both examples of how populist measures can be offered to appease a disaffected populace. However, we believe the fact that other countries face similar desires to weaken their budgetary stance means Spain should not be too badly penalized by bond investors for any modest fiscal slippage or post-election uncertainty. We would expect any instability in Spanish bond spreads sparked by the election to be reasonably short-lived.
Prospects Improving
The underlying economic backdrop for Spain remains good (especially when compared to Italy), and we think this should support bond spreads over time. Once the election has become old news and we have a functioning coalition, we would expect spreads to stabilize and then tighten. The demand for any yield pickup remains strong, especially if the European Central Bank (ECB) persists with its negative interest-rate policy.
In our view, robust economic growth could help Spain in two ways: it could alleviate pressure on the government to give in to the many extreme fiscally imprudent ideas emanating from the fringe political groups, and it could also boost tax revenues, thus reducing the amount of government debt over time. This would improve relative credit quality and reduce the need for a high-yield differential with the core European economies. Finally, it is worth noting that those core countries (and Germany in particular) are not the robust economic powerhouses they used to be, and their lower economic growth paths are likely to keep downward pressure on ECB rates and further narrow the perceived credit differential with Spain.
Authors
This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
Important information
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
Comments