UBS House View Daily

Thought of the day

03.10 - Will Spain’s crisis poison markets?

Political risk is back in Europe. Protests in the Spanish province of Catalonia, following an informal vote on independence, caused the nation's IBEX Index to underperform the Eurozone by around 1%, while the spread over German bonds widened by five basis points. A stalemate on the issue has the potential to disrupt the Spanish economy, especially if it leads to industrial unrest or the third general election in as many years. And the Catalan stance could embolden separatists elsewhere in Europe.

But we believe risks remain limited that the crisis will undermine Eurozone assets:

  • First, Spain accounts for a relatively small share of the Eurozone GDP and the MSCI EMU Index, at approximately 11% for both.
  • Second, we believe the chances remain low that Catalonia will split from Spain. A negotiated solution is likely. The EU has been clear that if Catalonia separates from Spain it will also leave the EU, creating a powerful incentive to remain.
  • Third, economic and financial conditions are fostering market resilience. Continued bond buying by the European Central Bank appears to be limiting the impact on peripheral bond spreads. (The yield on 10-year Spanish government bonds rose 8 basis points after the protests, and was flat on 3 October. Meanwhile, the Eurozone economic upswing has gathered pace, with second quarter GDP growth of 2.3% the fastest since early 2011.

So, within Europe we favor Eurozone equities over UK stocks.

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