monthly strategy report may 2017 - banca · pdf fileby emilio castelar and francisco pi i...

Monthly Strategy Report May 2017

Alejandro Vidal CrespoDirector of Market Strategies

The liberal movement in Spain: from the Constitution of Cádiz to the broadsword of Pavia. Part III

Monthly Strategy Report. May 2017

The liberal movement in Spain: from the Constitution of Cádiz to the broadsword of Pavia. Part III

In 1836, Bilbao was in the hands of those loyal to Carlos María Isidro, the brother of Ferdinand VII and rival of young Isabel II for the crown of Spain, when a combined Spanish-British fleet at Castro Urdiales awaited the arrival of 14 of Isabel’s battalions from the Mena Valley in Burgos. At the helm of the party was the commander-in-chief of Isabel’s troops, Joaquín Baldomero Espartero, a veteran of the War of Independence and the colonial wars in America.

Espartero’s army reached Castro Urdiales and embarked for Portugalete, where it arrived on 27 November and advanced on the hills of Baracaldo, at which point Espartero was besieged by heavy fire from the Carlists. Against the advice of his generals, he ordered a barge bridge to be built over the Nervión, but once having crossed the river, his troops were met with a ferocious attack that lasted until 19 December, when reinforcements arrived. On that day, with support from the navy artillery, a final offensive was launched on Bilbao, with Espartero and his forces entering the city triumphantly by the Luchana Bridge on Christmas Day 1836. From that moment, the Carlists would retreat until the end of the war, which was ultimately formalised by the Embrace of Vergara in 1839, when they surrendered their arms in exchange for official membership in Isabel’s army and a commitment from the State to maintain home rule of Gipuzkoa, Álava, Biscay and Navarre, which is still valid today.

In 1872, this agreement earned Espartero the title of Prince of Vergara, with the distinction of Royal Highness. But let us not get ahead of ourselves. The Battle of Luchana and the final victory over the Carlists had elevated Espartero to the height of his popularity, prompting both progressives and moderates to offer him a position in the government as Minister. Espartero ultimately opted for the former, probably due to his enmity of another general, Ramón María Narváez, a.k.a. the Broadsword of Loja (Espadón de Loja). After the mutiny at La Granja de San Ildefonso, the Regent Maria Cristina was exiled and Espartero took over the regency, facing a progressive undercurrent that advocated a shared power structure between three regents, a position championed by Agustín Argüelles, but which was defeated owing to a contingent of moderates that voted in favour of Espartero.

This egotistic manoeuvre, frowned upon by progressive liberals, would incite a deep division in the party that would lead to several military campaigns, including the O’Donnell uprising of 1841, which María Cristina instigated from France against Espartero and which was led by moderate military men like Diego de León, who lost his life in the revolt. Barcelona would also take up arms in 1842 in reaction to a crisis in the cotton industry that triggered widespread disruption. Espartero went to Barcelona and ordered the city to be bombarded from Montjuic, causing extensive damage. This would signify the end of his regency, as it would lead to the uprisings of Generals Prim, Narváez and Serrano (the latter two, both moderates). Espartero was exiled to England where he was welcomed with great affection.

In Spain, the government remained in the hands of General Narváez, who advocated a new, moderate constitution in 1845. The Cortes and the King, who gained an important margin of autonomy, would again share sovereignty.

This Constitution would also mark the end of the regency period by declaring Queen Isabel II of age at 13, and would remain in effect throughout her reign, until 1869.

From 1844-1854, Spain experienced a moderate decade (década moderada), with a total pre-eminence of conservatism, marked by the two presidencies of General Narváez, Istúriz and Bravo Murillo. In all three cases, the presidents would try to reverse several of the most radical measures of the revolutionary era and improve the relationship with the Church by signing a new Vatican Concordat (1851), to prevent


further confiscations like those of Mendizábal. Nevertheless, that same year Napoleon III staged a coup d’état against the Second French Republic, took control of France, and changed the political map of Europe by declaring the Second Empire. Bravo Murillo reacted by shuttering the Cortes and advocating a return to absolutism with a new constitution in 1852, but it failed and another military uprising broke out in a town near Madrid, Vicálvaro, known as La Vicalvarada, which led to a new government under Espartero, known as the Progressive Biennium (bienio progresista). This era would see the Railways Act, the initial phases of the labour movement in industrial regions, and new confiscations—those of Madoz—to finance all of the above. Bad blood between Espartero and O’Donnell, who had secretly assembled the Liberal Union, would almost spark a civil war and Espartero’s resignation in 1856.

The Liberal Union, led by O’Donnell at different periods, controlled the government from 1856-1863. Socially, the environment remained extremely turbulent, with uprisings orchestrated by the Carlists and the burgeoning movements of workers and peasants. The government sought to defend its position with an aggressive foreign policy that aimed to uphold the already long-lost image of Spain as an imperial power, in contrast to the rapid colonial expansion of England and France, that divided up the world while enraging central European powers like Russia, Austria, and Germany. The first sparks flew during the Crimean War. But Spain embarked on rather minor campaigns, such as the African wars, and offensives in the Pacific against Chile and Peru, until 1863 when the party founded by O’Donnell, which brought together the most kindred factions of the progressive and moderate liberals, imploded.

The period from 1863-1868 would be the definitive undoing of the rotating system of generals, who alternated power one after another. In 1863, a coalition of progressives, democrats, and republicans won the election, though General Narváez would receive the commission to form the government, an assignment he undertook with dictatorial verve, turning his back on the Cortes. Seven governments would take shape by 1868, and the instability of the system, in conjunction with the corresponding economic crisis (cotton, railroad, and a food crisis in Andalucía), would ultimately lead to the Glorious Revolution of 1868 and the exile of Isabel II.

But this would not bring an end to the instability. Initially, a provisional government was instituted, led by General Serrano and other important figures, like Prim and Sagasta. For the first time, this government would implement universal male suffrage and would clash with openly republican sentiment, represented by Emilio Castelar and Francisco Pi i Margall, who disagreed about a centralist vs. a federalist approach. This provisional government implemented several sweeping measures, such as the aforementioned suffrage and the abolition of slavery, which would spark bitter disputes with Cuba and Puerto Rico and foster the independent movement among elites. It would also implement the metric system and a single currency for Spain, the Peseta. But the main function of the government was still to search for a new king, and it chose Amadeo de Saboya, who was approved by the Cortes as a Parliamentary Monarch.

He would reign for only two years, from January 1871 until February 1873. His strongest supporter and leader of the first political force in parliament, General Prim, would die on the day of his arrival, the victim of an infamous attack on Calle del Turco de Madrid (Calle del Marqués de Cubas today). The death of Prim and Sagasta’s ascent to the party leadership triggered the disintegration of the main political party, which fell into chaos with the internal election of a new leader. Moreover, the new King was unable to unify the three monarchical options, which included his followers, the Bourbonist backers of Alfonso, and the Carlists, who would take up arms again in 1872 in support of the de facto King Carlos VII, who restored pre-Philip V home rule in Catalonia, Valencia, and Aragón to win the favour of these territories. This resulted in an absolute lack of control that led the King to abdicate and return to his beloved Italy. The next day, 11 February 1873, the Cortes proclaimed the Spanish Republic.

The National Assembly, comprised of the Senate and Congress, proclaimed the Republic and named Estanislao Figueras president, but the choice of a Centralist or Federalist approach would be left to the future constituent Cortes. Elections were called and the Federalist Republicans emerged victorious. But


naturally, things would not be easy…

There was infighting in the party among three factions: i) those who wanted to build the Federal Republic “from the bottom up”, known as Intransigentes, led by an assembly of figures who supported the formation and organisation of cantons which would, in turn, constitute the State; ii) the Moderados, led by Sagasta, who preferred to draft a Constitution and form a “top down” system of government, rejecting the concentration of State powers in the Cortes considered a revolutionary force; and in the middle, iii) the moderates who backed Pi i Margall, who would be elected president after Estanislao Figueras resigned, fearing the Intransigentes were plotting to assassinate him.

Pi i Margall decided to focus his efforts on ending the Third Carlist War, which prompted the Intransigentes to abandon the Cortes and form the cantons directly, thereby igniting the Cantonal Rebellion. The government of Pi i Margall lasted exactly 37 days. He was succeeded by the moderate, Nicolás Salmerón, who opted to quash the rebellion by appointing conservative generals like Pavía and Martínez Campos. They managed to suppress a good part of the revolt, but Salmerón resigned on 7 September (after less than two months) after refusing to sign the death sentences of the rebellion’s ringleaders, a practice to which he was radically opposed.

So, the presidency of the government—and I promise we’re nearly done—fell to Castelar. Having obtained extraordinary powers to govern by decree, he succeeded in suppressing the revolts and suspending the activity of the Cortes, until 2 January 1874, when they would reopen and subject Castelar to a vote of confidence. At the gates of Madrid, General Pavía waited with his troops to intervene should Castelar be defeated, thus officially triggering the cantonisation of Spain. And when exactly that happened, Pavía and his army entered Congress, dissolved the Cortes, and tried to restore the presidency of Emilio Castelar, who rejected the position, having obtained it undemocratically.

Though it would officially last for another year, the Spanish Republic and the liberal era had come to an end. The next year would usher in the period of the Unitary Republic, a dictatorship under Serrano, who seized control of the situation, and on 29 December 1874, Alfonso XII and the House of Bourbon returned to Spain, beginning the period of the Bourbon Restoration.

Spain left behind the most tumultuous period in its history, having definitively lost its position as a world power and devolved—for all intents and purposes—into a failed state. Political and institutional crises would accompany the nation for decades; the social, territorial, and ideological fractures would last equally as long. Some are still with us today. These deep-rooted social schisms and the fervour of their supporters led to deficits and shortcomings that it took a century to overcome. Without a doubt, the 19th century is full of history and hard truths.

Monthly Strategy Report May 2017

Equipo de Estrategia de Mercados de Banca March:

Alejandro Vidal, Unit Director, Market Strategies

Rose Marie Boudeguer, Service Director, Research Services

Pedro Sastre, Service Director, Market Strategies

Sebastián Larraza, Director, Discretionary Management Services

Paulo Gonçalves, Specialist Technician, Research Services

Miriam Ordinas Sanjuán, Specialist Technican, Market Strategies

Joseba Granero, Specialist Technican, Research Services

The improvement in corporate earnings is confirmed


The improvement in corporate earnings is confirmed

Higher corporate results and lower political risk in the eurozone bolstered stocks.

Since the beginning of the year, April has been marked on the calendars of investors as an important month. First, the publication of the year’s Q1 results would begin and, above all, the initial round of the presidential elections in France would be held. Once the month had ended, both would prove to be positive developments for stock markets, with the confirmation of improved corporate profits and reduced political risk in Europe.

The result of the first round of presidential elections in France eased political tensions.

Beginning with the French elections, the victor was Emmanuel Macron with 23.8% of the votes, followed by the far-right’s Marine Le Pen (21.4%). Both candidates will now proceed to the second round of voting on 7 May. This result and the polls indicate that Macron is the favourite by a comfortable margin. Moreover, in the second round, the candidate will have the support of the major party leaders: both the Republican and the Socialist Parties have endorsed Macron. This outcome undercut the political tension in Europe because the victory of an independent, pro-European candidate would provide greater stability to Europe.

The British government called for early elections in an effort to strengthen its position in Brexit negotiations.

With regard to Brexit, in a surprise move, the British government announced early elections for 8 June. According to Theresa May, this decision was made in an effort to achieve greater unity, stability, and leadership vis-à-vis the impending EU-departure negotiations. Meanwhile, EU leaders also sought a message of unity, in light of the upcoming negotiations, by signing a document advocating the need to move forward in three areas: the rights of British and EU citizens in both territories, the financial commitment assumed by the United Kingdom as a member of the EU—the amount could reach €100 billion, a figure Theresa May’s government rejects—and the study of the borders of Northern Ireland and the Republic of Ireland.

No major developments in Donald Trump’s tax reform.

On the other side of the Atlantic, the announcement of the new administration’s tax reform bill was expected. Donald Trump’s team indicated that the main goal would be to cut corporate taxes to 15% (-20 p.p.) and allow companies to repatriate capital at a “very competitive” rate, which has yet to be disclosed. The plan also aims to simplify taxation for individuals by reducing the number of tax brackets from seven to three (10%, 25%, and 35%) and lowering the maximum rate to 35% (vs. 39% currently). Despite some concerns about how these measures will be funded, the administration insists they will be fiscally neutral by boosting economic growth. These statements revealed very little and negotiations will now begin for possible approval in next fiscal year’s budget.

Geopolitical tensions increase with North Korea.

In negative news, the month was marked by an increase in geopolitical tension. The missile tests conducted by North Korea prompted international derision, with the Trump administration issuing the harshest statements, warning that it would take military action if North Korea continued its nuclear tests.


The IMF issued an upward revision of its global growth forecasts.

Turning to economic issues, global activity showed signs of a rebound, especially in the eurozone and in emerging economies. Subsequently, the IMF issued an upward revision of its growth forecasts for the year, now estimating that global GDP will advance +3.5% in 2017 (vs. +3.4% previously), up from the +3.1% recorded last year. Among developed economies, it revised eurozone growth forecasts upward to +1.7%, once again highlighting Spain, which it expects to grow +2.6% (vs. a previous estimate of +2.3%). Meanwhile, the growth forecast for the United States remained unchanged at +2.3%. Emerging economies will continue to rebound, with combined growth of +4.5%. The IMF issued an upward revision of growth in China to +6.6% (+0.1 p.p.), and Russia to +1.4% (+0.3 p.p.), while Brazil will grow +0.2%.

Activity accelerated in the eurozone, and Spain remains one of the region’s most dynamic economies.

This trend of greater economic buoyancy in the eurozone was confirmed by the fact that the region’s combined GDP grew at a quarterly rate of +0.5% in Q1, situating y-o-y growth at +1.7%. In Spain, the data published by the INE surpassed expectations, with Q1 GDP growing +0.8% q-o-q, which allowed a +3% y-o-y advance for the second consecutive quarter, establishing Spain as one of the most dynamic economies in the region. With regard to prices, inflation rebounded in April, with the eurozone CPI climbing to +1.9% y-o-y. In Spain, the CPI stood at +2.6%.

The ECB maintains its monetary stimulus.

In this context, the ECB maintained a message of continuity at its April meeting, though it was more optimistic about the evolution of activity. The authority decided to leave both interest rates and the deposit facility rate unchanged at 0% and -0.4%, respectively. It also reiterated that its asset-purchase program would continue at least until the end of the year.

Q1 GDP disappointed in the US…

In the United States, Q1 activity data failed to coincide with the sharp improvement in confidence, and GDP disappointed by growing only +0.7% (annualised quarterly) in Q1. This sluggish growth is primarily due to declining automobile sales and a reduction in inventories, while investment in capital goods continued to recover.

…while activity accelerated in China.

The Chinese economy accelerated its growth, posting a Q1 GDP advance of +6.9% y-o-y, surpassing the figure from the previous quarter and exceeding the +6.5% target. While the most dynamic components were services, which climbed +7.7% y-o-y, acceleration came from the secondary sector, with industry growing +6.4% (vs. +6.1% previously). Nevertheless, leading indicators eased their April upswings, hinting at less dynamism in the coming months. Specifically, the official manufacturing PMI dipped six-tenths to 51.2 and the Caixin counterpart fell to 50.3.

The improvement in activity translated to higher corporate profits.

The improvement of the economic cycle and, above all, of corporate profits, enabled global stock markets to continue appreciating in April. The MSCI World, for example, rose +1.4% for its sixth consecutive month of gains. The start of the Q1 corporate earnings season was promising: with figures from 69% of S&P 500 companies, profits grew +14% y-o-y with the ratio of positive surprises at an historically high 78%, confirming the changing cycle of corporate profits. In this climate, the S&P 500 climbed +0.9%, the Eurostoxx50 rose +1.7%, and emerging stock markets gained +2% in April.


Credit gains resumed.

Bond markets also performed well, supported by a continuation of the approach of the main central banks, which curbed price declines of investment-grade government bonds. Peripheral debt and corporate bonds, meanwhile, benefitted from the decrease in required spreads resulting from an easing of political risks in the eurozone, and credit benefitted from an increase in profits, which translates to lower default risks. In the case of Spain’s public debt, the required 10-year yield fell 2 b.p. to 1.65%, the global investment-grade corporate bond index appreciated +0.9%, and high yield gained +1.2%.

The euro capitalised on the decline of the political risk premium.

On the currency market, the euro strengthened on solid growth in the eurozone and, more importantly, on the decline of the political risk premium following the first round of elections in France. The single currency appreciated +2.3% against the dollar to 1.09 EUR/USD, and against the yen (+2.4%) to 121.5 EUR/YEN. For its part, the pound sterling was buoyed by expectations that the current government would emerge reinvigorated from the early elections and appreciated +0.9% against the euro to 0.84 EUR/GBP.

Once again, excess supply puts pressure on oil prices.

The relaunch of shale oil production in the US boosted inventories, which continued to drag down oil prices. In April, the price of a barrel of Brent fell -2.1% to $51.70. Gold, meanwhile, remained buoyant with a rebound of +1.4% to close the month at $1,257/ounce.


Strategy for May 2017

ASSET ALLOCATION

Overweight Neutral Underweight

Shares Cash Bonds

ASSET ALLOCATION

Overweight Neutral Underweight

EquitiesEurozone Asia Easten Europe

US Latin America

Bonds

Emerging debt Sovereign bonds

High-yield debt Investment-grade debt

Convertible Bonds

The global economy continues to accelerate.

The global economy’s growth rate continues to rise, though positive surprises in activity data have declined recently. Despite an anaemic start to the year, growth in the United States is expected to reach 2.3% in 2017. In the eurozone, we can anticipate rates similar to those of last year (1.7%), while emerging markets are expected to accelerate slightly.

Politics remains one of the key factors for markets.

Politics remains one of the key factors for markets, and recent developments in Europe have been positive. In France, the first-round election results generated relief by lessening the risk of a eurozone break-up, while in the United Kingdom, early elections offer the UK-EU binomial a clearer negotiation framework. For the moment, the 27 EU-member states have already established the priority areas of discussion.

Inflation will increase gradually.

With regard to inflation, the outlook is also positive: as long as oil prices remain around $50-55/barrel, inflation will rise gradually until it reaches the target level of the central banks: 2% for the FED and the ECB.

This scenario of inflation growth is conducive to less expansionary monetary policies.

This climate of economic growth and moderate inflation is conducive to less expansionary monetary policies. The Federal Reserve is expected to implement two additional increases this year and could begin to reduce its balance sheet by year-end by opting not to replace the bonds in its portfolio upon maturity. In September, the ECB may announce a further curtailment of its purchase program and it may consider a slight hike in interest rates on deposits in late 2017 or 2018. In any case, the prudence with which the central banks have acted thus far leads us to believe they will follow a gradual course of action and announce any changes in due time.

Monetary asset investments are unprofitable but provide a safety cushion.

To conclude the foregoing, in the next three months, eurozone interest rates will stay very low and, in this context, monetary asset investments will remain unprofitable. However, cash will continue to be necessary to provide the portfolio with a safety cushion.


Regarding sovereign bond investments, we recommend flexible management of fixed income on an international scale.

Because bond investments carry interest-rate risks—when interest rates rise, bond prices fall—it is advisable to invest in short-term bonds and slightly increase credit risk, which is preferable in the current environment of moderate growth and inflation. Regarding sovereign bonds, with interest rates so low and likely to rise, bonds from central European countries are unattractive. There is still some value in European peripheral debt that has undergone risk premium expansions due to political factors that may recede this quarter. With interest rates inching upward, fixed income should be actively managed—maximising market fluctuations and handling durations with agility—to avoid losses due to interest rate hikes.

We recommend diversifying the credit portfolio.

Despite declining yields, corporate debt still offers value given the momentum from corporate results and very low default rates. Still, we recommend diversifying the portfolio as much as possible by investing in different credit categories.

The publication of Q1 results shows healthy corporate profits.

Despite the positive performance of equities in the year thus far and the fact that stocks are not cheap, they still have upside potential because, after two years of declines, corporate profits are rebounding. Profit growth in the first quarter has been excellent, with more than 70% of companies exceeding expectations in the United States and Europe, and profits growing at rates near 14% according to the reports released thus far.

European stock markets may continue to outperform US counterparts, while emerging stocks retain their potential.

We recommend overweighting equities in portfolios—specifically, US and eurozone stocks. With higher potential given their fundamentals and valuations, we prefer European to US stocks. Emerging stock markets also have upside potential: higher growth in global trade and the stabilisation of commodity prices benefit companies in these economies.

In this scenario, the risks are political and geopolitical.

Nevertheless, there are risks that are largely political, e.g.: in Europe, the second round of elections in France, the populist threat in Italy, and difficult Brexit negotiations; in the United States, the risk of delaying and thinning stimulus measures. Geopolitical tensions in the Middle East and the Korean Peninsula must also be taken into account.

The dollar may strengthen as the Fed increases rates, but its potential is waning.

On the currency market, the dollar has struggled as a result of uncertainty about the US government’s economic policy and disappointing activity data. But the dollar has the potential to strengthen in the coming months as the Fed increases rates, and we expect it will again reach 1.05-1.03 EUR/USD. Although the upside potential is negligent, we still advise maintaining some exposure to dollars in the portfolio for diversification purposes.

We recommend maintaining the composition and diversification of the portfolios.

To conclude, we recommend maintaining the composition and diversification of the portfolios: with neutral exposure to monetary assets, underweighted in bonds and overweighted in equities.


Equity Indices IBEX35 (3 years)

Euribor Euribor 12 months (3 years)

EUR/USD (3 years)

10 years government yields

Currencies

Government Bonds

Corporate Bonds (1 year spread)

Commodities

Data: Bloomberg


Equity Indices performance (3 years)


Important Remark:

This contents of this document are merely illustrative and do not pretend, are not and cannot be considered under any circumstances as an investment recommendation towards the contracting of financial products.

This document has only been prepared to help the customer make an independent and individual decision but does not intend to replace any type of advice needed for the contracting of such products.

The terms and conditions described in this document are to be viewed as preliminary terms only, subject to discurssion and negotiation as well as to the agreement and final drafting of the terms affecting the transaction, which will appear in the contract or certificate to be issued.

Consequently, March Gestión de Fondos, S.G.I.I.C., S.A.U. and its customers are not bound by this conditions concerning the final documents to be approved. March Gestión de Fondos, S.G.I.I.C., S.A.U. does not offer any guarantee, expressly or implicitly, in relation with the information shown in this document.

All terms, conditions and prices contained in this document are merely informative and subject to modifications depending on the market circumstances, changes in laws, jurisprudence, administrative procedures or any other issue which may affect them. The customer should be aware that the products mentioned in this document may not be appropriate for his/her specific investment targets, financial situation or risk profile. For this reason the customer must make his/her own decisions by taking into account such circumstances and by obtaining specialized advice in tax, legal, financial, regulatoy, accounting issues or any other type of information required.

March Gestión de Fondos, S.G.I.I.C., S.A.U. does not assume any responsibility for any direct or indirect cost or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorization by March Gestión de Fondos, S.G.I.I.C., S.A.U.

Please note this document has been translated for your information only. In case of any errors or misinterpretations, the Spanish text will always prevail.

monthly strategy report may 2017 - banca · pdf fileby emilio castelar and francisco pi i...

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