Does the Sun Still Shine on Spain?

October 6, 2015

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This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  Stay tuned for details on GIC’s return to Spain in 2016!

In its recovery over the past three years, the Spanish economy has outperformed the economies of all its Eurozone partners except Ireland. But clouds have gathered with the fears over Catalonia separatist politics and over the outcome of the general election expected to take place in December, and there have been some recent adverse economic indicators as well.

Last Sunday’s regional election in Catalonia yielded mixed results. There is now a secessionist majority in the Catalan parliament, with 72 out of 135 seats. While the outcome was a victory for the separatist camp, the separatist vote at 47.7% fell well short of a majority. The central government in Madrid emphasized that there is no provision for separation in the Spanish constitution. The possibility of Spain breaking up continues to look remote. It is, however, likely that there will be some moves in the direction of Catalonia’s getting greater fiscal autonomy, perhaps following the example accorded to the Basque Country. What may be a greater worry for investors is the risk that the new regional government will be less business-friendly.

Overshadowing these concerns is uncertainty about the December national elections. Were those elections to result in a significant move to the left, the labor and product market reforms that have led to the recent outperformance of the Spanish economy risk being weakened or canceled. And progress toward fiscal consolidation could be reversed.

Spain’s robust economic recovery in the first half resulted in growth more than double the rate for the Eurozone as a whole. The annual growth for the economy this year looks likely to be over 3% compared with 1.6% for Germany, 1.2% for France, 0.7% for Italy, and 1.5% for the Eurozone. Growth has been broad-based. Domestic demand has been the main driver, and export growth also has been strong. Particularly welcome has been the creation of nearly one million jobs since mid-2014. Yet it will take until 2017 at the earliest to lower the unemployment rate below 20%.

The most recent data suggests that the Spanish economy began to lose some momentum in the third quarter, perhaps reflecting the slowdown apparent in a number of European economies. The Purchasing Managers’ Index (PMI) for September, just released, was at a 21-month low of 51.7. Since it is above 50, it still indicates an improvement in business conditions, but at a slower pace. New orders rose at the weakest pace since December 2013. The report suggests that macroeconomic risks are skewed to the down side going forward. Our expectation is that the economy will register somewhat slower growth next year, perhaps 2.7%, assuming no reversal in the economic reforms. That slower growth rate would still be better than the anticipated growth rate for any other Eurozone member except Ireland, whose economy should be able to repeat this year’s pace of almost 5%.

Equity investors appear to be paying more attention to macroeconomic risks going forward and to the political uncertainties outlined above than they are to Spain’s past robust economic performance. The iShares MSCI Spain Capped ETF, EWP, is down some 14.45% over the past six months, compared with the 10.29% drop for the iShares MSCI EMU (Eurozone) ETF, despite the Spanish economy’s growing at twice the rate of the Eurozone as a whole. From a technical perspective, EWP has drawn back to a support level in the high 20s, and its dividend yield at 5.4% provides some cushion. Nevertheless, investors may decide to await the outcome of the December election and to see if the third-quarter moderation in the economy’s momentum worsens or is reversed.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is an abridged commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at

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