An Investor Guide to Spanish Elections
(Bloomberg) -- Banks and real estate stocks are the most likely equity sectors to be affected if Sunday’s elections in Spain brings a coalition of the Socialist party and left-wing ally Podemos, a tie-up that could lead to tougher taxes for lenders and real estate investment trusts.
The most recent polls in Spanish newspapers suggest Prime Minister Pedro Sanchez of the Socialists has a chance to return to power provided he can manage tricky negotiations with smaller parties. Investors will be watching the composition of any new coalition closely, with polls showing that all parties are far from a majority.
“The market would certainly prefer a coalition of the mainstream parties, with a coalition between the Socialists, Podemos and the Catalan pro-independent parties being less market-friendly,” said Jose Ramon Iturriaga, who manages Spanish equities at Abante Asesores in Madrid.
While market watchers will get an indication of the result on Sunday evening, a final vision of the new government might take weeks or even months to form as talks on coalition agreements take place. This is the third election in four years in the country, after Sanchez called a snap election in February after failing to pass his budget.
Barclays economists led by Antonio Garcia Pascual see potential for a favorable market reaction to a pact between the Socialists and liberals of Ciudadanos or a conservative majority of People’s Party, Ciudadanos and nationalist party Vox.
“However, we would expect a neutral to mildly negative reaction to another minority government or new elections given expectations of policy deadlock, and a clearly negative reaction to a coalition of PSOE+Podemos+nationalist parties given expectations of the potential rolling back of reforms, and confrontation with Europe,” the economists wrote in a note earlier this month.
Here’s what else investors may be watching out for from the outcome of the April 28 ballot:
More taxes could be on the horizon for banks if the ruling Socialists team up again with Podemos, as the left-wing party pledged new levies for financial transactions and banks in its manifesto. Socialists will also look to increase taxes for large companies.
Podemos is also calling for banks to return the public funds used to bail out some lenders about seven years ago and to create a public bank using Bankia SA, which received 22 billion euros ($24.5 billion) in funds.
Banks that could be hit include the domestic lenders Bankia, CaixaBank SA and Banco Sabadell SA as well as the Spanish businesses of global banks Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.
In one of its last decisions, the Socialist government passed an emergency decree to cap housing rental hikes, inspired by the long list of demands from Podemos to control the real estate sector. The Socialists and Podemos also want to raise taxes on Spanish real estate investment trusts, known as Socimis.
Companies that could be affected would be Lar Espana Real Estate Socimi SA, Inmobiliaria Colonial Socimi SA and Merlin Properties Socimi SA.
“The PSOE government has been unfriendly to the Socimis, and we would expect Colonial & Merlin to benefit from lower regulatory risk if there is a change in government,” Alantra Equities said in a note earlier this month.
Since taking power last year, the Socialist government has reiterated its support of renewables and has taken specific steps toward closing nuclear plants in Spain. That policy benefits utilities that have a large bet on renewables, such as Naturgy Energy Group SA and Iberdrola SA, as well as renewable energy producers such as Solaria Energia y Medio Ambiente SA.
“The PSOE government has been pro renewables and has been friendly with regulated returns, and it is no surprise that utilities and renewable stocks have done well in the last few months, but this outperformance could reverse in the event of a change in government,” Alantra Equities said. Vox has pledged to keep the nuclear plants open.
Other companies affected by policy changes in the sector may include Acciona SA, Siemens Gamesa Renewable Energy SA and Audax Renovables SA.
For a look at bond performance and trading strategy in the election run-up, click here.
Spain’s 10-year bond spread versus bunds has barely widened from the 111 basis points when early the elections were called in February, according to data compiled by Bloomberg. Morgan Stanley strategists including Joao Almeida said earlier this month they maintained a constructive view on Spanish bonds as the macroeconomic strength of the country persists, but said that higher policy uncertainty may be a risk in the near term.
“Persistent weak reform momentum, because of greater political fragmentation, could reduce the allure of holding bonos,” the analysts said.
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