Catalonia’s three separatist parties won a narrow majority in regional elections on 21 December, dealing a blow to Spanish Prime Minister Mariano Rajoy. The separatists won fewer seats than in the last election in 2015, and failed to capture a majority of the popular vote.
While the election result is a reminder that political risk has not disappeared, we don’t believe renewed uncertainty in Spain will derail Eurozone or global markets.
- A unilateral secession still seems infeasible in the foreseeable future. Madrid’s successful implementation of direct rule over the region without provoking social unrest, and the lack of international support for a one-sided declaration of independence mean that the re-instated regional government would have to abide by the law under the threat of direct rule being re-imposed.
- In financial markets, Spain represents just 11% of the MSCI EMU Index, while economically, Catalonia represents 20% of the Spanish economy.
- The backdrop of strong global growth and earnings has made global equity markets more resistant to political upsets through 2017, and the outlook for next year remains positive. The VIX has recorded its lowest year on average since inception, and currently remains below 10.
A relatively small negative reaction in local markets should be expected – the IBEX 35 Index traded 1% lower after the news. Still, investors should consider the Catalonian political uncertainty an idiosyncratic domestic issue, without material impact on Eurozone equities. It is a reminder that the best protection against political risk is diversification, rather than retreating from risk assets.
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