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


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.   


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