Robeco: Fitch upgraded Spain to an A rating
Main market events
Despite the hawkish market reaction in the aftermath of the Governing Council of the ECB on Thursday, peripheral bonds have continued to perform well over the past week. This was mainly the result of the upgrade of Spain and Greece last Friday. Italian bonds have returned 0.68% year-to-date, Spanish bonds 0.97%, Portuguese bonds 1.03% and Irish bonds -0.43%.
The rising trade surplus recorded by Italy in 2017 – especially vis-à-vis non-EU partners – may appear at first glance surprising. The economic background was quite unfavorable with the recovery in commodity prices, the strengthening of the euro and the pick-up in domestic demand, which usually boosts imports. This good performance suggests an improving competitiveness of the country. Another positive news for Italy this week has been the delayed implementation of new stricter rules regarding the treatment of non-performing loans proposed by the ECB supervisors. The downside risk of bank lending weighing on the economic recovery has therefore been dampened. On the political front, there are growing signs of division within the centre-right bloc. Berlusconi’s allies overtly disagreed with his choice to nominate the president of the European Parliament Tajani as PM candidate for the centre-wing coalition.
Fitch upgraded Spain to an A rating with a stable outlook last Friday, triggering a compression in peripheral spreads early this week. This news has more than offset the rather disappointing Spanish unemployment rate and the announcement of Puigdemont as Catalan Premier candidate by the speaker of the regional parliament. Premier Minister Rajoy reiterated immediately his opposition to see Puigdemont being reappointed while remaining in exile in Belgium. In the meantime Rajoy also mentioned that he will be sent to jail if the Catalan leader were to come back to Spain. The Central Government has initiated a legal process in the Constitutional Court to block his re-election, which is set to take place on 31 January. This suggests some possible renewed tensions, but not as acute as the ones observed last October.
S&P upgraded Greece last Friday to B from B- with a positive outlook. The rating agency mentioned the improvement in growth and fiscal outlook as well as relative political stability.
Robeco Euro Government Bonds
The fund has an overweight position in Spanish government bonds and a small underweight position in Italian bonds. We are positive on Spanish fundamentals, while we remain wary of the political risks in Italy. We hold no Irish bonds as their spreads over France do not compensate for the potential risks stemming from Brexit, international tax reform and the volatility inherent to Ireland’s size. Currently the fund is 40% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.01%*.
* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, January 25, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.