Robeco: Peripheral Europe Update, Week 49
Main market events
Peripheral bonds performed quite well this week, with spreads tightening further against a backdrop of better than expected GDP growth in the third quarter. Spreads were not impacted by the rising number of ECB governing Council members suggesting to end QE at the end of September 2018. Italian bonds have returned 2.93% this year, Spanish bonds 2.01%, Portuguese bonds 13.96% and Irish bonds 1.85%.
According to the latest polls, the pro-independence camp will not succeed to gather an absolute majority in the Catalan elections that are scheduled for 21 December. This means that they may have to form a minority government with the left-wing Podemos party. That said, the voter turnout rate is likely to play a decisive role. The higher this rate, the higher the benefit to the pro-Spain parties, which are usually less prone to vote. If the separatist parties win the election, the negative consequences in the short-term should not be overstated. Their claim for independence has been significantly dampened after an important number of companies left Catalonia.
The release of the Labor Force Survey this week showed that the Italian labor market continues to improve with significant job creation in the third quarter, driven by a boost in temporary contracts. The participation rate has risen further, supported mainly by the older cohorts and to a lesser extent by the younger ones. On the political front, the M5 star movement is changing its communication to appear a “pro-EU” party, intending to “creating the future of Europe”. This is a response to a growing pro-European public sentiment among the Italian public.
Funding conditions in Greece may prove challenging next year after European official loans will cease in August. Greek bonds are currently not eligible in the ECB QE programme, as they are not rated investment grade. However, the ECB could well decide to accept them as collateral in its refinancing operations in order to ease potential funding stress in the second half of 2018.
Robeco Euro Government Bonds
We maintained our positions in periphery this week: we have an overweight position in Spain, a small overweight in Portuguese government bonds and a small underweight position in Italian government bonds. We are positive on Spanish fundamentals. We remain wary of the political risks in Italy, but for now the ongoing ECB buying and the improving economic backdrop support all peripheral bonds. 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. On net, the fund remains overweight peripheral bonds, concentrated in Spain. Currently the fund is 42% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is 1.50%*.
* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, December 7, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.