NN IP: IMF downbeat on Portugal

Peripheral Europe Update 

• IMF downbeat on Portugal 
• Italian referendum polls; No vote in the lead

Main market events

This week the market environment was bullish for government bonds. The main catalyst was the FED, who decided to keep the federal fund rate unchanged. Peripheral bonds even slightly outperformed German bonds. Portugal was the only exception, where the spread widening trend continued. Italian bonds have returned 4.31% this year, Spanish bonds 7.04%, Portuguese bonds -2.32% and Irish bonds 5.15%.

Portugal

In its latest country review, the IMF underscored the weakening economic recovery, despite fiscal support from the government and the ECB’s loose monetary policy. For 2016, the IMF expects an economic growth of just 1%. A top priority for Portugal is to address the banking sector vulnerabilities, since  weak balance sheets, caused by non-performing loans, hamper economic growth. The IMF expects that Portugal will miss the budget deficit target of 2.2% for 2016, given weaker economic growth and the increase in expenditures.

Italy

Polls about the upcoming referendum on constitutional reform points to an increase in the lead for a No vote. Still the share of undecided votes remains high at a level between 30-40%. The referendum, which will be held late November or during the beginning of December, is also closely watched by the rating agencies. Moody’s mentioned that it will reassess the post referendum result, as it determines the government’s ability to implement reforms.  SpainSpanish newspapers report that the socialist party PSOE is divided whether to support a PP led government or to form a government with Podemos. In recent polls support for PSOE is on the decline, which explains the pressure for PSOE to avoid another round of elections.

Robeco Euro Government Bonds

We maintain our cautious stance towards euro periphery debt, despite the ECB’s QE program. The lack of further reforms and the failure to improve public finances sufficiently in the current benign environment make the periphery vulnerable to economic shocks, political risks or financial-market volatility. Consensus positioning is overweight in the periphery.

We have kept positioning in the periphery unchanged this week. The fund doesn’t hold any short-dated bonds of Italy and Spain due to the unattractive valuations. Currently the fund is 22% invested in peripheral bonds, versus 39% in the benchmark. Year-to-date the fund’s absolute return is 6.27%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD September 22, 2016. The value of your investments may fluctuate. Past results are no guarantee of future performance.