Political uncertainty haunts Spain’s recovery

ToreadorSpain’s funds industry may have displayed many signs of recovery last year as the country managed to repair its economy, but political uncertainty has led Julius Baer to downgrade it to Neutral.

Spain was among the most badly injured European countries during the 2010 sovereign debt crisis, and spent subsequent years in a state of permanent recession, with rising prices and inflation, and record unemployment.

In 2007, Morningstar’s Spain equity fund category stood at €8.8 billion in size. By 2010, this figure had almost halved due to outflows of €4 billion.

Funds Europe revealed in a country report in our December/January edition that asset figures from the Spanish national investment association, Inverco, reflected positively on Spain’s wider funds industry.

The industry had total assets under management of €222.1 billion, at November 31, a figure unseen since February 2008. Overall, Spanish funds attracted total net inflows of €27.3 billion during 2015 – a rise of 14% on 2014.

Yet against this background, there is now more political uncertainty. On December 20, the country went to the polls, producing a hung parliament. At time of writing, a government is still yet to form – and the weeks of gridlock appear to have soured investors attitudes towards Spain for the time being and Spanish equities have underperformed other markets ever since.

“It remains questionable how stable the not-yet-defined government will be,” says Christoph Riniker, head of equity strategy research at Julius Baer.

“As a consequence the uncertainty among investors has further risen and the market has since underperformed other eurozone countries.”

The firm expects no near-term solution to the situation, and has downgraded Spain.

Looking ahead, the new leader of the Catalonian government has pledged to continue with plans to secede within 18 months. While the incumbent Spanish prime minister, Mariano Rajoy, has pledged to battle for national unity, he may well have a major fight on his hands. The uncertainty could deter investors from the embattled country even further.

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