October 9, 2017— On October 1, the pro-independence government of Catalonia in Spain (Europe’s fourth-largest equity market) held an independence referendum:

  • Ever since Spain became a democratic Kingdom in 1975, Catalonia, the nation’s wealthiest region, has agitated for increasing autonomy 
  • Catalans speak their own language, distinct from Spanish  ‎
  • The quest of many Catalans for independence has been just as much about the retention of fiscal resources at the regional level than about identity politics  
  • The longstanding Catalan issue should not be viewed through the prism of recent European anti-immigrant nationalism; the Catalan president’s political party is considered centrist.

 The referendum and its aftermath have been highly controversial:

  • Spain’s constitutional court had ruled the poll unconstitutional 
  • Anti-independence parties within Catalonia had called for boycott  
  • Spanish police forces intervened to stop voting at some polling places
  • Sporadic violence occurred between Spanish and Catalan police forces 
  • Voting irregularities occurred at some polling places
  • Turnout was only about 43% of eligible voters
  • Of those voting, 92% of those voting supported independence
  • The Catalan government is asserting a mandate to declare independence
  • The King of Spain appealed to Catalans to remain part of his realm  
  • The European Commission declared the referendum illegal
  • The Commission indicated that an independent Catalonia would be outside the European Union (EU) and have to re-apply for EU membership

We expect brinkmanship and negotiations between the Catalan regional government and Spanish central government.  

  • A “declaration of independence,” if any, should be viewed as part of the Catalan government’s negotiating strategy   
  • We believe Catalans realize they cannot achieve full sovereignty, in the sense that the country would be accepted into the EU and United Nations
  • The two sides will likely search for some formula that provides the region an even greater degree of autonomy, nevertheless falling short of full independence.  

Catalonia has never been a persistent source of instability and terrorism, as Spain’s Basque region had been for decades, nor do we expect it to become one. Nevertheless, a short period of unresolved conflict may temporarily depress the value of investments tied to Catalonia.

  • Bonds issued by the regional Catalan government already carry speculative grade ratings: Ba3 from Moody’s, B+ from S&P, and BB from Fitch
  • Spanish central government bonds carry low investment grades:  Baa2 from Moody’s, BBB+ from S&P, and BBB+ from Fitch   
  • Two Catalan banks comprise small weights in the MSCI Spain index, Caixabank and Banco de Sabadell; the European Central Bank stands ready to provide liquidity in the event of deposit withdrawals
  • Three non-bank Catalan stocks have small weights in the MSCI Spain index: toll-road operator Abertis Infrastructures, pharmaceutical company Grifols, and utility Gas Natural SDG; all three generate the majority of their revenues from outside Spain
  • The vast majority of listed Spanish stocks are headquartered in Madrid, and the three largest (comprising almost two-fifths of the index) are Banco Santander, BBVA, and Telefonica; these derive the majority of their revenue from outside Spain, particularly from subsidiaries operating in Latin America

Top 20 largest Spanish stocks in the MSCI Index by market capitalization

Picture3.png

Source: Bloomberg

Core narrative

We have an overweight to International Developed equities. Spain has the fourth-largest equity market in Europe by market capitalization, behind the U.K., France, and Germany. Listed Spanish stocks are largely headquartered outside Catalonia. Further, the revenues of the larger listed Spanish companies are primarily sourced from outside Spain, particularly from Latin America. Impacts of the Catalonia issue on International Developed equities are likely to be very limited and fleeting.  

We currently have a zero tactical allocation to International Fixed Income, so any price movements for Catalan or Spanish government bonds will have no impact on our clients.   

Disclosures

Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A.,  M&T Bank and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC.

These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.

The information on Wilmington Wire has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.

Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds. Past performance is no guarantee of future results. Investing involves risk and you may incur a profit or a loss.

Any positioning information provided does not include all positions that were taken in client accounts and may not be representative of current positioning. It should not be assumed that the positions described are or will be profitable or that positions taken in the future will be profitable or will equal the performance of those described. Positions described are illustrative and not intended as a recommendation outside of a managed account.

Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.

Third party trademarks and brands are the property of their respective owners.