Robeco: Rising political risks in the peripheral countries

Spain

In an effort to improve his chances to become PM again, Rajoy promised to decrease taxes further if he is reelected. In this regard, it was contrasting that the European Commission pointed out in Spain’s country review, that it should ensure a durable correction of the excessive budget deficit by 2017. The EC will decide in July, after the election, if Spain is fined for breaching the deficit limit.

Ireland

Moody’s upgraded Ireland from Baa1 to A3 with a positive outlook, reflecting that a further upgrade is possible if Ireland continues its current fiscal consolidation trend. As a sign of confidence, the upgrade came almost immediately after a new government was formed.

Portugal

The European Commission urged Portugal to ensure a durable correction of the excessive budget (4.4% 2015). This must be achieved as soon as this year. In July the EC will decide if Portugal will be fined and share its recommendations to reduce the deficit to 2.3% in 2016.

ECB

The ECB stepped up the buying volume in its bond purchase program from EUR 60 to 80bn per month as from April. This increase was visible in all countries except for Portugal and (to a lesser extend) Ireland. This relates to the limited amount of available Portuguese bonds. Our calculations show that it will be difficult for the ECB to buy any Portuguese bonds after summer.

Robeco Euro Government Bonds 

We continue to see the ECB’s QE program as supportive for peripheral debt, but political risks are rising in the peripheral countries and growth is no longer improving. As consensus positioning is overweight in the periphery we have become more cautious with respect to the periphery. 

We continue to have an underweight position in both Spain and Italy given the evolving political risks and since the current spread level makes the periphery vulnerable. We don’t hold any short dated bonds of Italy and Spain due to unattractive valuations. We have an underweight position in 10 year Italy and Spain. Peripheral bonds make up 16% of the fund. Year-to-date the fund’sabsolute return is 2.98%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD May 19, 2016.The value of your investments may fluctuate. Past results are no guarantee of future performance.