Robeco: Italian elections moving into focus

Main market events
Peripheral bonds lagged German Bunds this week. Spreads widened especially in Italy after newspapers mentioned March 4 as the likely date for next year’s elections. This apparently reminded investors of Italian political risks. Spanish spreads widened somewhat as well, while Portuguese spreads were fairly stable ahead of tonight’s rating decision. Italian bonds have returned 2.14% this year, Spanish bonds 1.79%, Portuguese bonds 14.03% and Irish bonds 1.61%.

Spain
This week, the latest polls for the Catalan election next Friday were more favorable to the pro-Spain camp. The two forces are now projected to receive a similar percentage of voting intentions. That said, a high level of uncertainty remains as a key factor will be the turnout rate. The support of Podemos to the pro-independent parties has been conditional to the latter renouncing to achieving independence unilaterally. It is therefore likely that the tone of the separatist movement will continue to moderate in the coming week. On the economic front, the recent modest pick-up in inflation to 1.8% observed in November was mostly driven by an increase in energy prices (5.9% up from 3.9% in October). By contrast, core inflation edged down at 0.8% yoy.

Italy
A high level of uncertainty prevails regarding both the election outcome that will take place early in March next year but also the shape of the government. According to local newspapers, the President is set to dissolve Parliament on 27 December, but the government will remain in charge until the new one is appointed. No absolute majority is likely to be reached, although the centre right bloc has been gaining momentum.

Portugal
This evening, Fitch will provide an update of Portugal BB+ rating that is associated with a positive outlook. A one notch upgrade to investment grade BBB- is widely expected by market participants against a backdrop of a promising growth, fiscal and political outlook.

Robeco Euro Government Bonds
We added a bit to our position in peripheral bonds this week as we closed the small underweight in Italian bonds. We now have an overweight position in Spain and a small overweight in Portugal, both versus Germany. We are positive on Spanish fundamentals. We remain wary of the political risks in Italy, but for now the ongoing ECB buying and the improving economic backdrop support all peripheral bonds. We hold no Irish bonds as their spreads over France do not compensate for the potential risks stemming from Brexit, international tax reform and the volatility inherent to Ireland’s size. On net, the fund remains overweight peripheral bonds, concentrated in Spain. Currently the fund is 45% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is 1.13%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, December 14, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.