Since October 1st, when Catalonia celebrated a referendum on independence considered illegal by the Spanish authorities, more than 1300 companies have moved headquarters from Catalonia to other Spanish regions, according to the Association of Registrants of Spain. The government has lowered the country’s economic growth forecast to 2.3% from 2.6%, blaming “Catalexit”, its worst political crisis in decades.
Nonetheless, Anand believes Spain’s economy is not in peril.
“[Catalonia] will be a political event rather than one with major economic consequences”, Anand told FSA on a recent trip to Singapore. “We haven’t made any changes in our portfolio because of it.
“Reaction from the Spanish bond market has been less acute than what you might have expected. That is one of the cleanest perspectives you can have on the medium term.
“If you think about the nature of many companies listed in Spain to invest in, they are of international nature, they don’t rely entirely on the national market.
“If we start to see over the next weeks or months significant underperformance from, let’s say, the Spanish banks or stocks, then I would see those as buying opportunities rather than sort of reacting with the selling sentiment.”
Fragmenting Europe
The UK and Catalonia represent the separatist movement in Europe while populist sentiment – also rooted in deepening dissatisfaction with EU leadership – is gaining momentum.
Earlier this year, Angela Merkel retained a majority in the government but lost a lot of votes and the anti-euro far right party won 13.5% of the vote. Populist candidates have recently won in Austria and the Czech Republic.
Investors will closely watch the 2018 elections in Italy, where the anti-EU M5S party has been ahead in polls for some time. Blackrock recently cited fragmentation in Europe as one of the top ten global geopolitical risks. UBS Group, in its Q3 financial report last week, singled out Europe as its top country risk:
“We remain watchful of developments in Europe, including the Catalonian referendum and political shifts in a number of countries. Our direct exposure to peripheral European countries remained limited, although we continue to have significant country risk exposure to major EU economies, including the UK, Germany and France.”
In Asia, roughly 209 Europe-focused funds across equities, ETFs and fixed income are available for sale in Hong Kong and Singapore, according to FE data.
Spillover contained?
In terms of economic risk, Anand argues that any potential spillover effect from Spain’s economy into broader Europe is not a key concern. He believes the EU economy has become robust enough to withstand single member state economic shocks.
Europe’s financial system is “either fully or largely recapitalised compared to post-financial crisis, so you are going to get less economic contagion”, he believes.
Additionally, the European economies have been taking down leverage and have become less tightly interrelated, he said.
“Take Greece as an example, now most of the holders of Greek bonds are either the [Greek] government or institutions. There are few foreign owners of Greek bonds. And similarly you are seeing that more across different European economies.
“Even when the euro is in very cheap levels, we are seeing strong earnings growth and reasonably good economic growth.
“One of the most startling statistics is that 75 percent of the equities in the market have a dividend yield higher than the corporate bond yield”.
He believes Europe is better equipped now to face separatism issues than it would have been in the midst of the recovery phase three years ago. “Then you would have seen a much bigger market reaction than what you can see now.”
