The liberal movement in
Spain: from the Constitution
of Cádiz to the broadsword
of Pavía. Part II
Monthly Strategy Report April 2017
Alejandro Vidal Crespo
Director of Market Strategies
Monthly Strategy Report. April 2017
The liberal movement in Spain: from the Constitution
of Cádiz to the broadsword of Pavía. Part II
We left off last month with the betrayal of Ferdinand VII who, with support from the Hundred Thousand
Sons of Saint Louis and the Duke of Angouleme, reinstated the old absolutist regime in 1823 and
repealed all vestiges of liberalism in Spain.
At the time, the key liberal leaders, including Mendizábal, left Spain for London in an effort to flee the
reprisals of the absolutists who, for example, hanged Rafael de Riego, defender of Malaga, in Madrid’s
Plaza de la Cebada. The liberals organised in London, where Mendizábal primarily engaged in business,
remaining there until the Revolution of 1830, when France’s absolute monarchy was overthrown in
favour of a parliamentary alternative, the July Monarchy, with Louis Philippe I on the throne. Like many
other Spanish liberals, Mendizábal then moved to Paris, where he financed liberal uprisings in Spain, like
that of the unsuccessful Espoz y Mina. He also took part in the Portuguese civil war, supporting and
financing the cause of the liberals in favour of Queen Maria II of Portugal. First from London and later
from Paris, Mendizábal supported and financed liberal movements wherever possible owing to his good
relationship with British financiers.
Meanwhile, the absolutist contingent in Spain was far from inactive. In 1830, Ferdinand VII was still
childless and in failing health. If the King died without an heir, his brother, Carlos María Isidro, would
ascend to the throne. But Ferdinand VII married for a fourth time, to his niece María Cristina de Borbón,
and within a few months, in May 1830, he issued the Pragmatic Sanction repealing the Salic Law that
prevented women from occupying the throne of Spain. Months later, on 10 October 1830, the couple
welcomed a daughter, Isabel. The absolutist party was subsequently divided between the moderates,
who sought a rapprochement with moderate liberals, and the ultra-absolutists, led by Carlos María
Isidro himself.
In 1832, when the King fell ill, the Carlists appeared before Maria Cristina demanding that the King (on
his apparent deathbed) sign an annulment of the Pragmatic Sanction. While not of sound mind, the
King signed, with the condition that it not take effect until after his death, a stipulation that the Carlists
did not respect. But the King did not die. Against all odds, he recovered and reinstated his daughter,
Isabel, as first in the line of succession, prompting his brother and his supporters, who refused to swear
allegiance to the Princess of Asturias, to incite a rebellion. In response, the King removed the Carlists
from the reformist absolutist government of Francisco Cea Bermúdez, and forced his brother into exile
in Portugal.
Soon after, on 29 September 1833 King Ferdinand VII died, and his two-year old daughter was proclaimed
sovereign under the regency of Queen Maria Cristina. The Carlists, however, refused to recognise a
female sovereign, leading to a civil uprising known as the Carlist War (1833-1840).
The liberals supported the Queen’s cause and, in fact, repopulated the government in 1834. Mendizábal
used his influence in London to obtain a series of loans to finance the war effort against the Carlists, in
addition to gaining support from the liberal governments of France and Portugal. In turn, he was named
Minister of Finance in 1835, and soon after, on 14 September 1835, Prime Minister, after opposing the
previous Prime Minister (the Count of Toreno) and the regency itself for the narrow political manoeuvring
of the government and the regency, which still failed to recognise such basic liberal principles as National
Sovereignty. This is what separated the two liberal factions known as the moderados (who advocated
for sovereignty shared with the King) and the exaltados.
Mendizábal then focused on winning the war against the Carlists and, in need of financing, he implemented
Monthly Strategy Report. April 2017
the measure that would cement his name in history: the Ecclesiastical Confiscations of Mendizábal,
whereby the government expropriated large tracts of land from monastic orders and sold them at
auction. But the considerable size and cost of these properties meant they were only accessible to
those with considerable fortunes—the well-heeled bourgeoisie and aristocrats—thereby preventing
the development of a true middle class in many parts of Spain. The proceeds were used to pay the
public debt and government loans, and in fact, payment at auction could be rendered by exchanging
public debt securities for their nominal amount rather than their market value, which was substantially
less given the precarious situation of the public coffers. This enabled many State creditors to be “bailed
out” with the wealth of others through forced expropriations.
The exaltados, led by Mendizábal, again prevailed in the elections of February 1836. However, the
Regent Maria Cristina replaced him as Prime Minister with Francisco Javier de Istúriz, prompting a string
of intrigues, revolts and riots that would culminate in the Mutiny of the Sergeants at La Granja. While
visiting the palace of La Granja de San Ildefonso, in Segovia, the Regent and the Queen (now aged five)
were held against their will by the Royal Guard, led by two sergeants, who forced the Regent to re-instate
the Constitution of 1812. Evidently, the mutiny was led by the liberals, and likely by Mendizábal himself,
but the ability of two non-commissioned officers and a handful of troops to reverse the constitutional
order of the country indicates the extreme weakness of the State and the absolute decay of the power
structures of an aging empire.
After this latest revolutionary period, in 1837, with the consensus of the moderate and progressive
liberals led by Mendizábal, a new Constitution was enacted, in which the more radical liberals accepted
shared sovereignty, the veto power of the monarch, and the bicameral cortes, with the creation of a
Senate appointed by the Crown from among a number of select candidates in each constituency. This
new Constitution of 1837 made it possible to integrate lingering elements from the old regime while
augmenting individual rights associated with freedom of the press and the popular election of mayors.
As a matter of note, voting continued to be by census and included only men who paid more than 200
reales in taxes each year, in other words, less than 5% of the Spanish population.
The period from 1836 to 1840 is marked by the war between the Carlists and the Isabelinos (those who
defended the claim of Isabel II). Meanwhile, the political figure who would be the next protagonist of
this story began to develop and take shape, General Baldomero Espartero, a war hero for his exemplary
performance at the Battle of Luchana and as a commander of the Isabelino forces in general. Espartero,
the general closest to the progressive liberals, would clash with other conservative military colleagues,
like O’Donnell, Narváez, and Prim, and would be Prime Minister several times, in addition to Regent, that
is, King in pectore of Spain.
Spain would then enter an extremely unstable period, enacting another constitution in 1845, engaging
in revolution in 1854 (known as La Vicalvarada), and finally forming the first republic. I invite you to
conclude this fascinating historical (and somewhat hysterical) period next month.
Improved activity
drives stock
markets.
Monthly Strategy Report April 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
Monthly Strategy Report. April 2017
Improved activity drives stock markets.
We close the first quarter with favourable stock market trends…
At the end of the first quarter of the year, the world’s primary stock markets are performing well,
supported mainly by improved global activity. It is also an opportune time to compare where we
were only 12 months ago, to glean some perspective on the major changes that have occurred
in the past year. As an example, this report from April 2016 was subtitled, “Fears of a global
recession are allayed.” As you will have read above, 12 months later, we have chosen: “Improved
activity drives stock markets.”
…that reflect improved global activity and increased corporate profits.
The improvement of the economic cycle and of corporate profits is the primary motive underlying
this good market behaviour: if we look at business confidence worldwide, the composite PMI
stood at 53.5 in February, while in the same period of 2016 it had dipped to 50.7, its lowest level
since 2012 and dangerously close to levels that would indicate growth contraction. Allow us one
more comparison to last year: at the close of March, the main global equity index (MSCI World)
had appreciated +6.4%, clearly outperforming the -7% decline posted in the first three months of
2016. This is another example of how the economic rebound and the subsequent improvement in
corporate accounts have enabled stocks to perform so well.
In the United States, consumption propelled growth and inflation…
Turning to the latest developments, macroeconomic data remains positive, confirming greater
economic dynamism. In the United States, growth was propelled primarily by consumption: Q4
GDP was revised upward to an advance of +2.1% annualised quarterly, as private spending rose
+3.5%. Leading indicators were also positive: the Conference Board Consumer Confidence Index
climbed to 125.6, its highest level since 2000. In large part, strong job creation accounts for the
uptick in spending.
…enabling the Fed to continue normalising its monetary policy.
In this context, the Federal Reserve raised interest rates by 25 b.p., situating them in the range of
0.75%-1%. This is the second hike in the last four months and the Fed justified the continuation
of its policy of tightening monetary conditions by the good pace of economic progress and neartarget inflation rates.
Leading indicators delivered a positive surprise in the eurozone.
In the eurozone, rather than curbing their advance as expected, leading indicators rebounded
again and in March, the region’s business confidence (composite PMI) rose from 56 (previously)
to 56.7, the highest level in the last six years. Meanwhile, inflation slowed its recovery, with the
preliminary CPI for March at +1.5% y-o-y and the core rate easing two-tenths to +0.7%, its lowest
level since April 2015.
Inflation remained contained and the ECB introduced no major changes in its approach.
This moderation of inflation curbed expectations of further reductions in ECB stimulus measures.
At its March meeting, the authority left both interest rates and the marginal deposit facility
unchanged at 0% and -0.4%, respectively. It also reiterated the message that rates would remain
at these levels or lower for some time. The ECB also held the last long-term refinancing auction
(TLTRO II), awarding EUR 234 billion over four years. This increase in the demand for financing
Monthly Strategy Report. April 2017
from commercial banks illustrates that European institutions have decided to secure financing
at reduced rates and would be prepared to increase lending in light of a boom in credit demand.
Spain met its revised deficit targets.
In Spain, macroeconomic data was mixed. While industrial production grew +2.5% y-o-y, consumption
declined: retail sales recorded zero growth in February. However, the most noteworthy news was
the latest public deficit figure, which closed 2016 at -4.3% of GDP (-4.54% if public aid to the
financial sector is included), below the 4.6% required by Brussels.
A busy political calendar managed to reduce uncertainty in Europe...
The results of a busy political calendar in March managed to reduce uncertainty in Europe. The
elections in the Netherlands were won by the current Prime Minister and liberal candidate in
the Dutch parliamentary election, Mark Rutte, who prevailed over Geert Wilders, a populist and
euro-sceptic, with the highest turnout since 1986 (82%). This result allayed concerns about a rise
in voters’ inclination to support euro-sceptic parties in Europe.
…as polls show waning support for euro-sceptic parties.
This trend has been confirmed by polls in the run-up to the elections in two major eurozone
economies. In Germany, the Frankfurter Allgemeine poll gives the victory in September’s general
election to Angela Merkel’s party (the CDU) with 34%, followed by the SPD with 33%, while
Germany’s Alternative party (AfD, euro-sceptic) would win only 7%. Likewise, the latest polls in
France continue to name Macron (the most pro-European candidate among the top candidates)
the second-round winner—with more than 60% of votes—over Le Pen (39%).
Official Brexit negotiations are set to begin.
In the UK, the Brexit process progressed and the government of Theresa May finally triggered
article 50 of the Treaty of Lisbon, which will start official negotiations for the nation’s departure
from the EU and which could last up to two years.
The US Congress failed to reach a consensus on reforms.
On the other side of the Atlantic, political uncertainty increased with the failure of President
Trump’s healthcare reform. The lack of support within the Republican Party itself prompted the
president of the United States to withdraw his proposed healthcare reform bill which, according
to the Congressional Budget Office (CBO), would cause as many as 14 million Americans to
lose medical coverage by 2018, while reducing the federal deficit by USD 337 billion in 10 years.
This was one of Trump’s main campaign promises and it highlights the difficulty in reaching the
consensus necessary to push through reforms.
Activity data stabilised in emerging economies.
Finally, in the emerging world, the primary economies show signs of stabilisation and—in those
that suffered consumer price spikes last year—lower inflationary tensions. In China, consumption
growth eased with cumulative retail sales figures for the first two months of the year up +9.5%
y-o-y, compared to +10.4% previously. On a positive note, industrial production rebounded to
+6.3% y-o-y from +6% previously. In Brazil and Russia, inflation continued to slow, with CPI easing
in both economies in February to +4.7% and +5%, respectively.
More growth and less monetary stimulus weighed on higher-rated bonds.
On financial markets, the positive tone of the leading indicators and the less expansionary approach
of the central banks put pressure on higher-rated bonds, which closed the month with slight
Monthly Strategy Report. April 2017
declines. This trend was more pronounced in the case of Germany’s government bonds, where
required 10-year yields rose 12 b.p. to 0.33% in March. Meanwhile, peripheral debt performed
better as political uncertainty eased: in the case of Spain, 10-year rates ended the month below
1.7% and the Spanish sovereign bond index closed flat. In the United States, despite the Fed’s
interest rate hike, on the secondary market, 10-year rates were once again at 2.4%.
After major gains, credit curbed its rise.
The spreads required on corporate debt also increased last month, and on a global level, credit
closed with slight declines: both investment-grade and high-yield corporate debt shed -0.1%. For
its part, emerging sovereign debt closed the month with gains: in local currency (+1.9%) and in
USD (+0.4%).
European stock markets led gains.
Stock market gains continued, bolstered by an acceleration of growth. In March, performance in
European marketplaces improved, with the Eurostoxx50 up +5.5%, and the Ibex35 leading the
gains by advancing +9.5%. Emerging stock markets also performed well, with the MSCI Emerging
Market Index up +2.3%. The US stock market, meanwhile, took a breather and the S&P500 ended
the month relatively unchanged. The exception to this good performance was the Japan, where
the Toppix lost -1.5% in March.
The euro-dollar crossover remained in range.
There was higher volatility on currency markets and, specifically, in the euro-dollar crossover,
which rose and fell: the euro appreciated to nearly 1.08 EUR/USD with the improvement of
eurozone growth prospects and possible further reductions in ECB stimulus. However, at the end
of the month, easing inflation interrupted this trend, reducing the euro’s rise to 1.065 EUR/USD
(+0.7% for the single currency). The pound sterling weathered the official Brexit announcement
and appreciated +0.6% against the euro, closing below 0.85 EUR/GBP with support from the
Bank of England’s less expansionary approach. The yen performed similarly, advancing +0.5% to
119 EUR/JPY.
Increased supply put pressure on oil prices.
Oil prices receded, with a barrel of Brent down -5% to $53. This development is explained by
increased supply, with the US confirming that shale oil production would continue to expand,
thereby boosting inventories. Gold, meanwhile, remained buoyant, closing the month at $1,249/
ounce.
Monthly Strategy Report. April 2017
Strategy for April 2017
ASSET ALLOCATION
Overweight
Neutral
Underweight
Shares
Cash
Bonds
ASSET ALLOCATION
Equities
Overweight
Neutral
Underweight
Eurozone
Asia
Europa del Este
EE.UU.
Latin America
Emerging debt
Bonds
High-yield debt
Convertible Bonds
Sovereign Bonds
Investment-grade debt
The evolution of the global economy will remain positive.
The evolution of the global economy will remain positive, according to business and consumer
confidence data, which have hit one-year and, in some cases, 10-year highs. Although the latest
data on real activity falls short of confidence data levels, it should be noted that these indicators
usually anticipate events three or six months in advance, so greater dynamism would be evident
in this second quarter.
Growth forecasts made earlier this year are being revised upward.
In this context, analysts and international organisations are issuing upward revisions of the growth
forecasts made earlier this year, especially for the United States and the eurozone. In the US,
consumption remains buoyant and industrial production has begun to rebound. In the eurozone,
because the slowdown expected in countries like Spain, Germany and France has yet to materialise,
we can expect to see rates similar to those of last year.
Inflation will rise gradually.
With regard to inflation, the news is positive because—after avoiding deflation—the excessive
increase in inflation that was feared following the publication of the price data for January and
February (months in which energy price spreads between this year and last were exacerbated)
was also curtailed. Thus, as long as oil prices remain around $50/barrel, inflation will rise gradually
until it reaches the target level of the central banks: 2% for the FED and the ECB.
This scenario is conducive to less expansionary monetary policies.
This climate of growth and moderate inflation is conducive to less expansionary monetary policies,
primarily in the United States, but also in Europe. However, given the prudence of their actions
thus far, we trust that both the FED (this year) and the ECB (next year) will follow a gradual path
and changes will be announced well in advance.
The FED will implement two further rate hikes this year, thus US rates will continue to rise.
Specifically, the FED is expected to implement two additional increases this year, which would
raise interest rates to 1.25%-1.5% by the end of the year. These expectations have yet to be fully
absorbed by the market. Therefore, US interest rates will continue to rise and by year-end, they
will be at least half a point higher than they are today.
Monthly Strategy Report. April 2017
The ECB will start to curtail its asset purchases.
In Europe, the ECB will start to curtail its asset purchases in April, a course that will continue
until the end of 2017. However, a few months before the end of the year, it may announce further
reductions to the programme and it may consider an interest rate hike in 2018.
Investments in monetary assets remain largely unprofitable. There is still some value in the European
peripheral debt.
In this context, because investments in monetary assets remain largely unprofitable and bond
investments carry interest-rate risks—when interest rates rise, bond prices fall—it is advisable to
invest in short-term bonds to mitigate interest-rate risk and slightly increase credit risk, which is
preferable in the current environment, despite the fact that the popularity of this strategy over
the past year has increased corporate debt.
We recommend diversifying the bond portfolio as much as possible.
Regarding sovereign bonds, there is still some value in the European peripheral debt that has
undergone risk premia expansions due to political factors that may recede this quarter. US bond
investments may benefit from active management that makes the most of the higher yields of
these bonds but sidesteps losses due to interest rate hikes, capitalising on market fluctuations
and managing durations with agility. As for corporate debt, despite declining yields, some niches
remain in the high-yield category, in companies in emerging countries, and in European financial
institutions. In this context, we recommend diversifying the bond portfolio as much as possible.
Stocks will rise as profit growth is revised upward.
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 corporate profit growth continues to be revised
upward. This year’s Q1 earnings season, which begins in a few days, should confirm this.
European stock markets may outperform US counterparts, which will continue to be affected by
stimulus delays.
In this regard, a distinction should be made between US and European stocks, regions where we
are overweighted. Although the economies on both sides of the Atlantic are performing well,
the policy is less favourable. If, however, the political fears that have prevented greater gains in
European stock markets are dissipating, they could see higher growth than their US counterparts,
which will continue to be adversely affected by a lack of specification in the government’s
economic policy.
Emerging stocks have also retained their potential.
Emerging stocks have also retained their potential. The stability demonstrated by China, coupled
with a highly-functional India (industrial production, exports on the rise) after weathering last
year’s tough demonetisation process, lays the groundwork for profits to continue rising, especially
in Asia. Meanwhile, with improvements in commodity prices, the recovery in Brazil and Russia, and
a dollar that is not expected to grow stronger, profits will advance in other emerging regions as
well.
Exposure by sector and stock selection will remain relevant.
Exposure by sector will remain relevant, although the importance of stock selection will also
increase. As cyclical expansion lengthens, we focus on exposure in the portfolios to more cyclical
sectors, like technology and finance, in pursuit of a balance with the existing opportunities in more
Monthly Strategy Report. April 2017
defensive sectors.
Investors have realised that fiscal stimulus measures will be slow to implement in the US.
On the negative side, stock markets are still exposed to political risks: in Europe, the French
elections are critically important, though not to be disregarded are the populist threat from Italy
and difficult Brexit negotiations. In the United States, investors have realised that fiscal stimulus
measures will be slow to implement and may be less substantial than promised.
Rate hikes will provide support for the dollar.
On the currency market, the dollar is struggling to strengthen further given the uncertainty of the
US government’s economic policy, but the rate hikes planned for this year will provide support
for the greenback, which will trend toward parity. Therefore, in addition to diversification and as a
means of mitigating political risk in Europe, we recommend maintaining some exposure to dollars
in the portfolio.
We recommend neutral exposure to monetary assets, less-than-neutral exposure to bonds, and
higher exposure to equities.
To conclude, the current context is favourable for cyclical financial assets, but because spikes
of volatility are expected, we recommend maintaining a highly diversified portfolio: with neutral
exposure to monetary assets, despite their zero profitability, and less-than-neutral exposure to
bonds. As equities currently have the highest potential, we remain overweighted in this asset
class.
Monthly Strategy Report. April 2017
Euribor
Euribor 12 months (3 years)
Currencies
Government Bonds
EUR/USD (3 years)
10 years government yields
Corporate Bonds (1 year spread)
Commodities
Equity Indices
Data: Bloomberg
IBEX35 (3 years)
Monthly Strategy Report. April 2017
Equity Indices performance (3 years)
Monthly Strategy Report. April 2017
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