By Mary Fjelstad, senior research analyst
Precisely when and how markets factor expectations of political change into valuations can be difficult to pinpoint. Lately, however, we've become accustomed to political reversals and upheavals having a significant impact, both immediate and long term, on equity market performance - think Brexit and UK stocks, for instance. The Catalonian independence movement in Spain is the most striking current example of this phenomenon, with a clear effect on both Spanish and Eurozone stock market performance in 2017.
The Eurozone stock market region generally had a strong year in 2017, as measured by the FTSE Eurozone Index, which had a return of 13.9%. This was in excess of the 9% return for the rest of the global equity market (as measured by the FTSE All-World® ex Eurozone Index) over the same period.* However, within the Eurozone, Spain had the highest returns in the period preceding June 9 (as measured by the FTSE Spain Index), the date on which Catalan President Carles Puigdemont announced that there would be a vote on Catalonian independence scheduled October 1.
The chart below compares total returns for 2017, returns from January 1 to June 9, and also returns from June 10 through end of year. During the first period, the Eurozone index significantly outperformed the index covering the rest of the global equity market (a 13.3% return as compared to 4.8%). This outperformance was due in large part to Spain.
The FTSE Spain Index had a return of 19.4% over this time period, well in excess of returns for indexes covering the Eurozone as a whole as well as Germany, France and Italy individually. But this pattern reversed during the period after June 9. The impact of the constitutional crisis on the Eurozone in general, and on Spain in particular, is clearly reflected in these post June 9 index returns, especially for Spain (-6.6%).
The FTSE Spain Index had strong returns on the year up until the crisis began (June 9 approximately), but managed to stay above the aggregate Eurozone index on a cumulative basis until the day after the controversial Catalonia independence vote on October 1 when the valuation of the Spanish stock market plunged (see the following chart).
As the central government moved to control events, Spain regained parity with the overall Eurozone (again on a cumulative basis for the year), but developments towards the end of October once again upended the market: the Spanish central government seized control of the region and set a new date for Catalonia elections for December 21. We see a final downturn after the December 21 election when a majority of Catalonians voted for pro-independence parties although the single largest party supported unity.
The Spanish constitutional crisis of 2017 appears to be a clear example of the old dictum that financial markets don't like uncertainty. Whether it is an accurate reflection of what independence might mean to the Catalonian economy, only time will tell.
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*All returns and performance numbers in EUR.
 Corey, D. "Catalonia's bid for independence from Spain: A timeline of developments," NBC News, November 3, 2017; and Associated Press, "Catalonia separatists declare victory," CBS News, December 22, 2018.
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