Robeco: Peripheral Europe Update

The ECB minutes showed concern that inflation will remain low for a long time as wages are hardly rising despite the improvement in labor markets. Several ECB speakers confirmed that it is too early to reduce monetary stimulus like the bond buying program. Italian bonds have returned-0.98% this year, Spanish bonds -0.11%, Portuguese bonds 5.6% and Irish bonds -0.37%. 

Italy

 The governing party PD has proposed changes to the electoral law. These changes go completely against the changes proposed last week by the 5Star movement, the largest opposition party. Both proposals are unlikely to be approved, especially in the senate. Adjustments to the electoral law are necessary to achieve a workable majority for any likely coalition government. The president will not call early elections before the electoral law is adjusted.

Greece

The Greek parliament approved the reform measures that are agreed between the Greek government and the institutions. Despite the agreement on technical measures, there are still important issues on the table. PM Tsipras made clear that he requires debt relief for the reform measures to be implemented. It’s hard to see that Germany will agree to debt relief ahead of the German general elections in September. 

Portugal

The first estimate of GDP growth for the first quarter came in much stronger than expected. Real GDP grew 1.0% QoQ, where 0.6% was expected. This compares to 0.7% QoQ in the fourth quarter of 2016, was also better than expected. Although the breakdown to contribution factors are not available, but net export is likely a relevant contributor. 

Robeco Euro Government Bonds

This week we opened an overweight position in Italian bonds versus Spanish bonds. Italian fundamentals are clearly weaker than Spanish fundamentals, but this is already reflected in the current spreads. Italian government bonds have strongly underperformed Spanish bonds over the past year. Consensus positioning is underweight Italy. Many market participants fear imminent renewed political turmoil in Italy combined with the ECB withdrawing its support for bond markets. These fears are overblown and we expect Italian bonds to recover.We maintain our overweight position in Ireland. Irish bond spreads are attractive given the improved Irish fundamentals and its strong ESG scores. Currently the fund is 39% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.72%*.