Foreword

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This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

Key takeaways

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  • In a referendum deemed illegal by Spain’s central government, Catalonia has voted to secede. The leader of the Catalan government has signalled his intention to declare independence in the coming days
  • A number of hurdles exist to Catalan independence, with Madrid ultimately having the option to take control of the regional government via Article 155 of the Spanish constitution. Ultimately, this might be enough to preserve the territorial integrity of the country
  • Investors have so far shrugged off the possibility of a breakup. The situation remains very fluid and we are monitoring developments closely. For the time being, our asset class views remain unaltered. In respect of the eurozone, this is an overweight stance on the region’s equities, and an underweight on government bonds

Again, Catalonia votes for independence…

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On Sunday 1 October, Catalonia voted in an eagerly awaited independence referendum. The days in the lead up to the vote saw Spain’s central government intervene to thwart a vote it deemed illegal, whilst polling day itself saw violent clashes between voters and police.

According to the Catalan government, 90 per cent of the vote backed independence on a turnout of 42 per cent. This compares to 80.1 per cent who voted for independence in a non-binding referendum almost three years ago (with a similar turnout).

Carles Puigdemont, the leader of the Catalan government, has confirmed his intention to request a vote in the regional parliament on a declaration of independence (within two days of the announcement of the official results).

Spanish Prime Minister Mariano Rajoy has refused to acknowledge the result.

Possible scenarios

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The most benign outcome is that Catalonia backtracks on its pledge to announce independence. This may pave the way for negotiations between Madrid and Catalonia to provide greater autonomy for the region, ultimately dampening enthusiasm for territorial independence.

A declaration of independence, on the other hand, is likely to be referred to Spain’s Constitutional Court. If Catalonia subsequently commences the independence process, for example by establishing its own fiscal authorities and written constitution, tensions could then quickly escalate.

For example, Rajoy is has the option of using powers under a recently enacted “National Security Law”, which can include taking control of regional police forces.

He may also trigger Article 155 of the Spanish constitution, which would effectively allow Madrid to take over the government of Catalonia. This would require an absolute majority in the Upper House, which Rajoy’s PP party currently command. This is seen as an extreme option that has never before been invoked.

Either way, fresh elections in Catalonia seem likely, providing another test of region’s appetite for independence.

Investment implications

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So far markets have shrugged off the aftermath of Sunday’s vote. Spanish government 10-year bond spreads (versus German bunds) are roughly where they were a few months ago (Figure 1). Meanwhile, although the country’s benchmark equity market (IBEX 35) has dipped in the past two days, it has performed roughly in line with European-wide indices (e.g. the EURO STOXX 50) since the beginning of the year.

Figure 1: Spanish 10-year government bond spread

Source: Bloomberg, as at 03 October 2017

As outlined above, there are significant barriers to Catalonian independence, also including the risk of isolation outside of the EU (as confirmed by the European Commission on Monday). Overall, these barriers may be enough to preserve the territorial integrity of Spain.

We await to see the response of both Madrid and Catalonia in the coming days. The situation remains very fluid and we are monitoring developments closely. For the time being, our asset class views remain unaltered. In respect of the eurozone, this is an overweight stance on the region’s equities, and an underweight on government bonds.

Disclaimer

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