A phrase that used to be heard when getting rid of a troublesome person was to give them the elbow.
Last weekend’s Spanish local elections could be seen as giving the incumbent government of Mariano Rajoy and his Popular Party a slap in the face as they and the major socialist opposition party (PSOE), traditionally the mainstays of a two party political system, endured a torrid outcome.
Having lost control of the major cities of Valencia and Madrid and eight of the thirteen regions, the shift in power away from the two traditional party system has received another boost with the fledgling Podemos left wing party gaining significant ground and media coverage.
Receiving less coverage but also a major beneficiary of the political turmoil embracing Spain is the more liberal Cuidadanos (Citizens Party) who favour increased ties with Europe. Their anti-austerity mandate is gaining much international coverage but what gets slightly overlooked is that the swing away from the major traditional parties is as much a factor of anti-corruption as it was in Greece when Syriza gained power last December.
This backlash against years of corruption should not be underestimated and could be argued to be more relevant than anti-austerity.  So while Spain, having taken a large dose of financial pain and medicine post 2008/9 as well as enduring a property crash, is now looking like the growth beacon in the Eurozone.  However that recovery might do little to help Senor Rajoy in December’s general election especially as while unemployment has fallen significantly, it’s still above 23% at the last reading.
The electorate may be unforgiving of the big (but shrinking) two party system and may prefer a new broom to sweep away the corruption of past administrations as happened in Greece. Nobody really expected Alex Tsipras to deliver on his financial calculations but they did expect a fairer government under Syriza.  The same lack of trust has recently been evidenced in the UK general election where Labour paid the price for its economic mismanagement at the end of the last decade.
But what does the Spanish local election results mean for Europe?
It represents another challenge to the German led economic austerity/big brother model alongside Greece and here in the UK through the in/out referendum.  While Greece may set an unpleasant and untimely dent to the single currency, it is a small part of the problem of too much, eventually unrepayable debt.  The European Finance Ministers are unlikely to soften their stance with Greece and give added impetus to Podemos and Cuidadanos ahead of December’s general election.  There will continue to be a ‘who blinks first’ mentality with Greece talking the talk and Germany playing hardball but not wanting Greece to leave if possible.
The UK however is more important to Germany as a significant economic power within Europe that they can use to persuade the French to toe the line.  Ultimately Germany has benefited from a weak euro and seen its current account surplus soar.  Eventually there will likely be a softening of European fiscal policies and directives to appease Spain and the UK. Germany wants the Eurozone to stay together and the UK to be part of its vision of a united Europe.
Back in Spain, it isn’t likely to be any change to austerity promises that ushers in the next government: it’s more a question of trust or the lack of it in the incumbent parties.
European bonds are unattractive – someone will wake up in a cold sweat one day when they look back on paying some governments and some corporates for the privilege of lending them money! However while European equities aren’t especially cheap, they should benefit from a positive economic and monetary backdrop.  A potential cloud could occur when the European Central Bank (ECB) works out it can’t buy enough bonds to satisfy its quantitative easing (QE) programme and we get a European ‘taper tantrum’ although they have attempted to front run that by saying their bond asset purchases will reflect the seasonality of European government bond issuance.
At T. Bailey we have held a ten per cent allocation to European equities in our Growth Fund since well before QE and after we’d seen European money supply, loan demand and sentiment surveys pick up.  Our two fund holdings are complimentary and are both index agnostic. One focuses on global businesses based in Europe, the other on European companies more directly exposed to the European economic recovery.  Just buying a passive investment in Europe might not be as specific as one would like which is important when equity indices are at these elevated levels and volatility, either through politics or central bank action, isn’t likely to diminish.

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