Catalonia: A Constitutional Party Wins For The First Time, But Separatists Maintain Absolute Majority

Constitutional party wins for the first time in CataloniaInés Arrimadas celebrates her victory with Ciudadanos's leader Albert Rivera

Ciudadanos (37 seats) was the party which won the most votes in Catalonia but will not be able to form a government. The independent block still has control of the Parlament with 70 seats versus the 57 won by the constitutionalists and the 68 needed for an absolute majority.

Ciudadanos’ victory is significant, a difficult milestone to achieve given the current electoral law. This establishes that the value of the votes is multiplied in rural areas, namely where the independence movement has its strongest roots. Ciudadanos won in the 10 biggest cities in the region. But the secessionists were able to hold on to their absolute majority in the regional parliament. That said, they did not exceed 48% of the total votes, as has been the norm for the last two decades.

The result of the elections has sparked a lot of incognitos, some of which will have light shed on them in the coming weeks/months. Link Securities analysts flag these possible uncertainties: i) it’s not clear if the secessionists will reach an agreement on who will be the elected president; ii)neither is it clear whether those elected MPs who are in exile or in prison can participate in the vote to form a new regional government; iii) there are also doubts over the secessionists’ attitude: if it’s going to be totally confrontational; if they intend to reactivate the Unilateral Declaration of Independence; or if they are going be more practical; iv) neither can we rule out Article 155 being implemented again, although this possibility seems complicated to us after the disastrous results obtained by the ruling Popular Party, which leaves the government even weaker than it was; v) if more companies are going to start leaving Catalonia for other Spanish regions; etc. What is clear is that all those factors will generate uncertainty which will be felt by the Catalan economy. And because this accounts for 20% of Spain’s GDP, it will also have an impact on the whole country’s economy.

In light of this scenario, Spain’s stock market opened down this morning, touching minimum levels below 10.200 points. Those stocks with more exposure to Catalonia and the region’s banks like CaixaBank and Sabadell led the losers. In the debt market, the interest required on Spanish bonds is over 1.5%. We also expect declines in prices in the bond market, as well as an increase in yields and in the risk premium.

That said, Link Securities analysts don’t believe there will be a river of blood, given that the State, somehow or other, has shown it has resources to defend itself against the terrible secessionists and investors already know that.

“But we still believe that in the coming months the Spanish stock market will underperform the rest of the main Eurozone bourses in relative terms, at least until this complicated scenario is a bit clearer. That said, we would point out that there are some companies in the Spanish stock market with hardly any exposure to the Spanish economy. If the other stock exchanges maintain their current good trend, they can continue to perform well.”

Renta 4 believes the political uncertainty will be prolonged, amid a situation where governance will be difficult, but with extreme scenarios of unilateralism in decision-making after the result of the elections.

As far as the markets are concerned, these analysts believe that despite the 2% drop the Ibex futures indicate, Spain’s risk premium remains very contained for the time being (+5 bp to 110 bp), with the implicit fundamental backing of the ECB. The contagion affect for other European markets should be limited (Eurostoxx futures -0.5%).

On the other hand, Alphavalue’s comments could not be more pessimistic:

“The companies which are leaving, the lack of support from Europe, the 75% decline in investments in Catalonia, being outside the legal constitutional framework…It has served for nothing. The result is frankly a bad one and adverse for the constitutionalists’ interest. The repercussion for the markets should be negative and we will remain in a limbo of insecurity. We still don’t have any Spanish stock in our selection of 25 European ones.”

Whether we like it or not, the debate over the Catalonian issue will continue.