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How Will the Catalonia Referendum Impact UK-based Investors?

Catalonia Referendum

Yesterday’s disputed referendum on Catalonian independence, which the Spanish region’s government says has resulted in a landslide majority for ‘Yes’, may well prompt a political crisis within the EU more significant than Brexit. There are also likely to be significant repercussions for European financial markets in the coming days, weeks and months that stock market investors from the UK should be aware of.

Alongside the rhetoric from both sides, the Spanish Premier Mariano Rajoy stating “there was no referendum, just a pretext of one”, and Catalonia’s premier Carles Puigdemont announcing “with this day of hope and suffering, Catalonia has earned the right to be an independent state,” were disturbing scenes of heavy handedness by Spanish police.

Spanish police forces clashed with voters after being given orders to prevent voting at polling stations from going ahead and Catalan government figures were putting the number requiring hospital treatment at 844. Rubber bullets were fired and there were clashes between Spanish police and local Catalan officers and firefighters reported to have been attempting to peacefully protect citizens.

This morning the Catalan government released referendum results which showed 90.9% of 2,020,144 votes cast in favour of secession. 15,000 votes were still to be counted and an estimated 770,000 inaccessible or lost as a result of police closing stations and seizing ballot boxes. Spain’s constitutional court has declared the referendum illegal. However, Catalonia is expected to announce a unilateral declaration of independence within the next few days.

The Spanish government have done their best to delegitimise the result, with the constitutional court ruling that the result is not only without legal force but illegal. The police attack on the voting infrastructure, which included preventing access to polling stations, confiscating ballot boxes and shutting down computer systems means the government will also deny the vote on the grounds it was neither fully democratic nor auditable.

How things will now play out is difficult to predict. However, there will certainly be a period of turmoil which will impact European financial markets, which many London-listed companies, especially the more internationally-diverse FTSE 100 constituents, are heavily exposed to. Political upheaval is also generally a negative influence on financial markets.

Spain prime minister Rajoy’s control of the Spanish government may well be under serious threat now. His party has a minority that is shored up by the Basque National Party, which is thought to be extremely unhappy at the government’s handling of events in Catalonia over the weekend. ING’s Spain and Portugal economist Steven Trypsteen said in a note last week that the government may have difficulty in gaining approval for its 2018 budget. That could lead to the end of Rajoy’s tenure.

Spain has had an impressive economic recovery in recent years. Civil disobedience, strikes and disruption in Catalonia, one of Spain’s most economically prosperous regions, would jeopardise that. Spain’s benchmark IBEX 35 equities index, has started today showing volatility, currently down 0.8% on Friday’s close. UK investors holding European-economy focused ETFs with exposure to the IBEX 35 will want to keep a close eye on how things develop. A wider European-markets fallout is also possible depending on how things progress from here. The FTSE 100, however, is not suffering for now, up 0.45% today.

Equities and other investments denominated in euro could also suffer. The euro is down 0.66% against the dollar this morning though it is currently flat against the pound. UK-based investors with Eurozone and euro exposed investments would be well advised to closely monitor the Catalonia fallout over the coming days and weeks

Paul

The author Paul