McNeill himself, who manages the Kames Absolute Return Bond Fund Global, has been an early victim of the Catalonian aspirations for independence. “We introduced a trade in our fund which was long Spanish government bonds and short Italy because we thought the credit quality of Spanish bonds was much better,” he told an audience of Barcelona-based investors at Expert Investor Spain last week.
“But we lost money on that trade because in the run-up to the recent election [on 28 September], Spanish bonds were consistently underperforming,” he added.
At the beginning of June, Italian and Spanish 10-year government bonds were trading on par at around 2%. Though Italian government debt as a percentage of GDP is much higher than Spanish debt and GDP growth is better in Spain, the yield on Italian bonds is now about 20 basis points higher than its Spanish equivalent.
A revolutionary feeling
“So this discussion about independence is completely relevant to what we do,” concludes McNeill, who himself, being a Scotsman, has recent first-hand experience with the issue. The sequence of events during the Scottish independence campaign earlier this year has taught him that votes on independence are completely unpredictable. Recalling the atmosphere in Scotland back then, he said the debate around independence was drenched with emotion, and generally wasn’t based on rational arguments: “It was a revolutionary feeling. I would take that with me into a future referendum [in Catalonia]. The balance of arguments isn’t really what people vote on.”
So investors in Spanish government debt will be facing quite a bit of uncertainty in the next months and possibly years, believes McNeill. And volatility will reach a climax if the two sides start quarrelling about the national debt. “If there will be a negotiation over what side takes what share of the national debt, that will give a lot of uncertainty.”
Meanwhile, Barcelona’s fund buyers are doing nothing to ease the tensions. The audience at last week’s conference was split almost equally about the question of independence: 46% support it, while 54% want Catalonia to remain part of Spain. This is exactly the same result our poll gave back in February, suggesting the two sides will be hard to reconcile…
Click here to see a full overview of the event’s voting results.
And here you can find a slideshow of photos taken at Expert Investor Barcelona.