Investors showed relief as market’s worst scenario of a Podemos-dominated government didn’t materialised after Sunday’s general election in Spain.
The center-right Popular party improved its relative majority, as the far-left party (Unidos Podemos) didn’t improve its position, remaining the third party behind the center-left (PSOE).
“The results of the Spanish election were comforting for investors in the wake of the Brexit shock. Although the wave of populism in Europe cannot be ignored given the significant anti-establishment and anti-austerity foundations, the surprise third place for Podemos took away some uncertainty,” said Sandra Crowl, member of the Investment Committee at Carmignac.
The conservative party extended his lead over the opposition, but it is still well short of the 176 seats required for a majority, so a governing coalition remains unclear.
“Spain will remain without a strong government and it will take time to form a coalition,” said Jon Day, global bond portfolio manager at Newton Investment Management.
“However, Unidos Podemos’s poor performance does mean that reform measures will not be reversed and the Spanish economy should continue on its slow recovery (subject to wider global events), Day said.
David Zahn, head of European Fixed Income at Franklin Templeton, also said many of the existing economic and fiscal policies will remain in place, as the incumbent government is likely to retain influence.
“This will in turn bring some level of economic stability to the country. I think this is the main reason why we have seen Spanish bonds rally off [Sunday] news,” Zahn said.
Spanish bonds can continue to stay underpinned, on the back of further European Central Bank measures and a “very necessary leniency” by the European Commission to allow another year for the Spanish government to comply to budget deficit targets, Crowl said.
However, fund managers should diversify portfolios away from government debt, Crowl said, as there’s still much uncertainty in regards to the creation of a new government.
“The Spanish equity market should reflect this uncertainty and still have a lower performance than European indices,” said Philippe Ferreira, senior cross asset strategist at Lyxor.
NO EXTREMISM MOMENTUM
The Spanish elections’ results show the pundits suggesting that extremism is growing in Europe and will grow further after Brexit are being proved wrong, for now, according to Credit Suisse.
There is “contagion in reverse” if anything, back towards traditional parties on the back of uncertainty, said Giovanni Zanni and Anais Boussie, from Credit Suisse European economics department.
This suggest Spaniards are prioritising stability and continuity over change, perhaps exacerbated by events elsewhere on the continent, Zahn, from Franklin, said.