Actual Political Action—on the Iberian Peninsula

Editors’ Note: MarketMinder Europe prefers no party nor any politician. We assess political developments for their potential economic and market impact only.

Whilst the UK political world is focussed on former Prime Minister David Cameron’s return to frontline politics, events in Britain have ample competition for the global political spotlight—particularly from the Iberian Peninsula. Just as Spain’s incumbent prime minister finally reached an alliance with two small parties, paving the way for a confidence vote this week, Portugal’s president announced the country will hold a snap election in March to replace Prime Minister António Costa, who resigned last week due to a corruption scandal.^[i] What do we think investors benefit in knowing? Read on.

Spain’s coalition agreement promotes gridlock and ruffles some feathers.

Waaay back in July, which feels to us like an age and a half ago, Spain held a snap election as incumbent centre-left Prime Minister Pedro Sánchez seemingly surmised an early contest would limit the damage as the centre-right opposition climbed in the polls.^[ii] Surprising many commentators we follow, it worked: The centre-right Popular Party, led by Alberto Nuñez Feijóo, won the most seats, but its natural coalition partners weren’t sufficient to form a majority, and the opposition declined to abstain from a confidence vote and enable Feijóo to head a minority administration.^[iii] So Sánchez got his chance to try and has spent the last several weeks negotiating with potential partners.

These negotiations now look complete. The easy (ish) one, in our view, wrapped in late October, when Sánchez’s Spanish Socialist Workers’ Party (PSOE) reached a coalition agreement with the leftist Sumar alliance (which incorporated the leftist populist party Podemos).^[iv] We think this was more or less low-hanging fruit since PSOE and Podemos governed together before the election, and their agenda was largely a warmed-over version of their prior to-do list. But it also didn’t cause much commotion amongst publications we follow, since Sánchez still needed support from Catalan separatist party Junts in order to win a confidence vote.^[v] In our view, that was a much taller order given their leader has been an exiled fugitive since holding an illegal independence referendum in 2017.^[vi]

But now the PSOE and Junts have reached an agreement. In exchange for full amnesty for leader Carles Puigdemont and about 1,400 other activists and politicians involved with the referendum, Junts agreed to support PSOE’s legislative agenda for a full four-year term provided its leaders believe sufficient progress is underway on Catalonia’s political conflict and a new independence referendum.^[vii] This has demonstrably stirred anger amongst the People’s Party (PP) and other opposition parties, not to mention the general public, according to coverage we follow. Protests are flaring in Madrid, and last week’s shooting of a prominent conservative Catalan politician has further frayed the country’s nerves.^[viii]

At times like this, it can be easy to focus on the sociological implications, and those are indeed important. But for investors, we think it is important to tune out everything that doesn’t connect to economic and market policy, lest emotion and bias sway decision making.

On Friday, Sánchez also struck an agreement with the Basque Nationalist Party, which should give his multiparty coalition the seats needed to win a majority outright in the first round.^[ix] With a Sánchez victory looking all but confirmed, we think uncertainty should fall as the current tensions simmer down and people get a clearer view of what the Junts amnesty (which will require a parliamentary vote) means.

Regardless, Spain will quite likely be gridlocked. A Sánchez government would effectively have seven participating parties, which, in our view, is a recipe for very little happening as different factions take advantage of their outsized influence. Sánchez’s prior government didn’t pass much, despite widespread warnings from several commentators we follow that they would undo the previous decade’s pro-market reforms, and this new coalition would just extend the status quo. A snap election would likely yield a similarly fractured administration regardless of which party heads it, as polls don’t presently point to anyone winning a majority.^[x] Voters may hate the bickering and inaction, but our research shows markets typically enjoy gridlock, which tends to give them a break from contentious legislation creating winners and losers. Lower legislative risk can enable more investment and risk taking, which we find stocks benefit from even if investors never realise it consciously.

Portugal moves forward.

One country heading to new elections is Spain’s Iberian neighbour, Portugal, where Prime Minister Costa resigned last week after a corruption investigation ensnared his chief of staff, the infrastructure minister and several other members of his inner circle.^[xi] Prosecutors haven’t implicated Costa, who maintains his innocence and has pledged to cooperate with the authorities, but police raids on government buildings and several politicians’ homes sealed his fate.^[xii] After meeting with party leaders last Wednesday and Thursday, President Marcelo Rebelo de Sousa announced the country will hold elections on 10 March.^[xiii]

Uncertainty seems high here. Costa had been in power for eight years and had a rare absolute majority in Parliament. His party sits in a tie atop the polls.^[xiv] Yet it also needs a new leader and must rebuild its reputation after being plagued with various corruption allegations for years. Meanwhile, centre-right opposition Partido Social Democrata (SDP) are co-poll leaders, and a more populist right-wing party is on the ascent.^[xv] And with nearly four months until the vote, we think there are numerous ways this could go.

But as uncertainty falls gradually and stocks gain more clarity, markets should move on to weigh the post-election environment and assessing the likelihood that the next administration—whichever way it leans—will be able to pass much legislation. Here, the recent past might be a helpful guide. When Costa took power in 2015, several commentators we follow suggested reforms enacted during the eurozone debt crisis would get the axe, reversing the country’s improved creditworthiness and economic competitiveness. But that didn’t happen. Despite some changes at the margins, Portugal’s recovery from the crisis continued—just like Spain’s did under similar fears when Sánchez took power.^[xvi] Markets moved on.^[xvii]

This time, we suspect markets would see a new Socialist-led administration as an extension of the status quo. In our view, gridlock would probably bring relief, too. If the centre-right wins, we can envisage a scenario where markets get overly optimistic about pro-market reforms in the run up to the contest, then come back to earth if reality proves disappointing—similar to what we are watching for in Greece. Not that we are playing favourites or anything, but we think it is always important to remember markets tend to move most on the gap between reality and expectations, and not the party and personalities of the people in charge.