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Catalonia Referendum Crises an Opportunity for Online Stock Trading?

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UK-based investors with exposure to Spain’s economy, the eurozone and euro-denominated assets may well have been nervously watching events unfold in Catalonia yesterday. However, a recent study by fund supermarket Fidelity on how UK investors who held their nerve during the financial crisis to keep investing have reaped significant returns, shows there might also be an opportunity opening up.

Spain’s economy has been enjoying a resurgence in recent years, having taken longer to bounce back from the financial crisis of 2008/09 than most of Western Europe’s other big economies. There is a real danger that the fall-out of yesterday’s referendum could have a negative impact on Spain’s continued recovery. The country’s benchmark equities index, the IBEX 35, finished the third quarter 1% down last week in contrast to average gains across Eurozone equities.

If Spain’s government categorically rejects the results of the referendum, which seems likely, a period of civil unrest, strikes and demonstrations would be expected in Catalonia, one of Spain’s most prosperous regions. That won’t help the economy. Prime Minister Rajoy’s minority government also relies on the support of the Basque National Party, said to be deeply unhappy by the government’s handling of the referendum, which saw violence erupt between voters and national police forces instructed to prevent the vote going ahead. A collapse of that uneasy alliance may mean Rajoy’s government failing to get its 2018 budget through parliament, a situation which might bring about the early demise of Rajoy’s current tenure in charge.

Political unrest, falling productivity and potential euro weakness could all be seen as threats for investors with exposure to Spain and the wider Eurozone in their investment portfolios. Time to sell down or get out entirely? Maybe not. The turmoil in Spain could also be an opportunity for investors of a more steely disposition to buy cheaply.

Fund supermarket Fidelity recently published data showing that UK investors who kept their nerve over the financial crisis and continued to invest £5000 a year into funds tracking the FTSE All Share index, which reflects the entire London Stock Market, would now be sitting on £81,561. By comparison, paying the same into a savings account would have meant a current balance of just £50, 603, a practical loss when taking inflation into consideration.

History has demonstrated that the best profits are realised by calm investors who swim against the tide by investing during stock market drops to take full advantage of a subsequent recovery. That would suggest that rather than selling out of Spain and euro-exposed assets any dip due to the current political climate might be an opportunity to buy more cheaply. It’s wouldn’t be an approach without risk as if things get messy and/or Catalonia does manage to secede, the wider Spanish economy could feasibly suffer more permanent damage than it did during even the global financial crisis. This kind of contrarian stock market investing also requires patience and longer timelines as there is no guarantee how quickly a recovery will be.

However, for investors with some appetite for risk, looking at Spain-focused funds and ETFs could be a real opportunity if equities markets on the Iberian peninsula take a hit over the coming months. Most of the major online stock trading platforms UK investors use have funds and index trackers that offer exposure to Spain, either entirely or as part of a wider Eurozone focus.

Paul

The author Paul