Market WatchRT @MarketWatch Spain's turn: Will Brexit impact Sunday's election? https://t.co/lBwKLdjxpx— GlobalAwareness101 (@Mononoke__Hime) June 25, 2016
written by Barbara Kollmeyer
Saturday June 25, 2016
U.S. voters can complain all they want about this year’s presidential election battle—but at least they won’t have to live through it twice.
So it might be appropriate to pity the Spanish voter, who heads back to the polls on Sunday for another general election after the last contest in December failed to produce a government.
Months of political deadlock and squabbling between four parties—two upstart and two traditional—have left the country in a state of political paralysis, and acting Prime Minister Mariano Rajoy leading a caretaker government. Investors fear that paralysis may remain after this weekend.
It is Rajoy’s Partido Popular that has the lead, according to a Metroscopia poll taken one week before the election.
Latest poll by Metroscopia one week before the Spanish elections #26J #Spain pic.twitter.com/4dHXWlb8Bx— Iliana Mier-Lavin (@imlavin) June 18, 2016
Here are five important things to know about the Spanish vote:
How did we get here? Spain’s general elections last December ushered in big losses for the two dominant parties, Rajoy’s Partido Popular (Popular Party) and the Socialists (PSOE). That was as two upstart parties—left-wing and antiausterity Podemos, which literally means “we can,” and business-friendly, anticorruption Ciudadanos (citizens)—saw strong enough finishes to break the traditional hold by the established parties.
The election outcome left the two main parties unable to form a government, and King Felipe VI himself was forced to finally dissolve parliament and call new elections. It went down in history as the shortest lived parliament since democracy was established after dictator Francisco Franco died in 1975.
Now what? Much to the annoyance of the already fed-up Spanish public—the unemployment rate hovers at 20%, the highest in the European Union after a lengthy recession—another general election will take place Sunday. Results of the election should be known late that evening, local time.
Recent polls indicate that the general elections will deliver another fragmented parliament, with results similar to the December outcome, said Apolline Menut and Antonio Garcia Pascual, economists at Barclays. They expect a minority government will be formed ahead of the summer break, more than likely led by the Popular Party.
“One important factor determining which party will lead that government is whether PSOE maintains second place (as in December, when it returned 90 MPs) or comes third, with less MPs than Unidos Podemos,” as suggested by the latest polls, the analysts said in a recent note to clients.
But Unidos Podemos is a potential game-changer in the new election. The left-wing electoral alliance was formed by Podemos, an antiausterity party that’s barely two years old, the United Left (IU), Equo and allied left-wing parties in May. Led by Podemos’s popular, ponytailed leader Pablo Iglesias and IU’s Alberto Garzon, recent polls show the leftist alliance could make big enough gains to come in second behind PP.
The outcome and markets: Clearly, for many analysts and financial markets, a biggish win by those upstart parties would be a worry, with the memory of Greece and the victory of its own anti-Establishment party, Syriza, fresh in the minds of some. It’s no surprise that Rajoy has been emphasizing such concerns, arguing that a victory by the upstart parties could undermine stability.
Menut and Pascual said if the election produces another minority government, key reforms may not pass and that could weigh on Spain’s medium-term growth prospects.
The country needs action on fiscal issues and labor markets, given its long-term unemployment issues and huge youth unemployment problem, they said. The European Commission is expected to announce in July whether it will fine Spain and Portugal for not reducing their budget deficits fast enough to comply with European Union fiscal rules.
The Barclays economists expect political risks to remain elevated after the election and Spanish assets to continue to underperform relative to what economic fundamentals would justify. The Spain IBEX 35 Index IBEX, -12.35% is down 8.5% on a year-to-date basis, slightly underperforming the Stoxx Europe 600 index SXXP, -7.03% loss of 6.6%.
A PP minority government led by someone other than Rajoy, or a grand coalition of PP and the Socialists would make markets happy, said Predrag Dukic, senior equity sales trader at CM Capital Markets, in emailed comments. “On the other hand, a PODEMOS UNIDOS+PSOE government would be a disaster.”
The Brexit twist? The surprising U.K. exit from EU after last Thursday’s referendum could alter the outcome of the Spanish election, said UniCredit analysts Luca Cazzulani and Edoardo Campanella, in a note issued ahead of the Brexit vote.
With a leave camp victory “the heightened financial and political uncertainty that would follow would likely persuade undecided voters to lean on the more moderate traditional parties, or on Ciudadanos itself,” they said. While no party would likely win an absolute majority, the Socialist party could preserve its second-place finish and Ciudadanos could erode some support for Unidos Podemos.
Buying opportunity? Dukic said trying to determine whether Spanish stocks are attractive right now versus other European countries really will depend on the outcome of the election. “Assuming that Unidos Podemos are not part of the government, I would be looking at domestic banks, utilities and construction companies as sectors which should outperform,” he said.
European banks have had a rough year, though Spain’s giant BBVA SA BBVA, -18.85% BBVA, -16.18% has fared marginally better than Germany’s Deutsche Bank AG DB, -17.49% DBK, -13.92% with a 16% versus 32% loss respectively, year to date.
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