Homage to Spain

Why recent local elections don’t change the investing scenario

All politicians are required to get out and “press the flesh,” as shaking hands with voters is dubbed. As my flesh was being pressed by Carmen,* my mother’s longstanding masseuse, the results of last Sunday’s local elections in Spain seemed a fit subject for discussion.

Mention the governing Partido Popular (PP) and her strength redoubles with indignation at the constant revelations of corruption in its midst. She pays little attention to the party’s labour reforms and austerity measures, which allied to a low oil price laid the seeds for this year’s recovery. GDP in 2015 is forecast at 2.8%, the fastest growth since the crisis in 2007, although unemployment at 24% remains high (if overstated due to the immense black economy). Exports are shooting through the roof on the back of a weak currency and the private sector’s restructuring.

Mention the opposition Partido Socialista Obrero Espanol (PSOE) and her outrage at the revelations of their corruption – less than the PP only because they have been in power less in the last twenty years – turns into the pummelling of a 25-year old. Not one knotted muscle remains untouched.

Podemos (We can) is the only party that almost makes the massage gentle and ineffective. Almost. The new protest party had to tiptoe back from its flattering embrace of Venezuela’s leaders and bankrupt political system, as its poll ratings plummeted. Spaniards may be fed up with the corruption of the main parties and with a recovery that has yet to be felt beyond the confines of the privileged. A number of them were willing to use their votes in the elections this week to punish the two behemoths of old by voting for Podemos and its other incarnations and sympathisers. But it is doubtful that this will be repeated in national elections.

When a year and a half ago Podemos was at its height, gaining 28% of the intention to vote poll, there was a whiff of concern in the Circulo Empresarial de la Competitividad which groups together top executives from the 17 largest multinationals in Spain, including Telefonica and Santander. The elite business group reportedly opened its collective wallet to support another protest party, Ciudadanos (Citizens), as a counterweight. This was a small, pro-business Catalan-based party which advocated the autonomous region remaining part of Spain.

Ciudadanos has now spread out on a national scale and won over 6% of the vote. It would have won more seats if it had put up more candidates. Carmen, whose family was on the side of the Republicans in the Civil War, sees it as little more than a mini-PP. The pressure intensifies and any tennis elbow I thought I had disappears under her disapproving strokes.

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Carmen is 70 years old. Her power reflects that of her generation in Spain. But where she is stepping back from her metier, giving me a massage in memory of old times, too many of Spain’s oldies are clinging on to power.

Over 50% of the Presidentes (Executive Chairmen) of the Ibex-35, the Spanish equivalent of the FTSE-100, are over 65 years old. One, Francisco Gonzalez of bank BBVA, has just re-taken the CEO title as well. Another, Emilio Botin of Santander, gave up his role only on his death.

“We have spent too many years with our bums ensconced in our chauffeured cars,” says a 65-plus year old Spanish tycoon over drinks at the Ritz Hotel.

Despite the intransigence of the over 65s, renovation is happening in the political class. Forty-seven year old King Felipe VI, known as the best-prepared Borbon king in history, took over from his father Juan Carlos I at the end of last year. Alberto Sanchez, a photogenic 43 year old, is the leader of the PSOE. Cuidadanos is headed by fresh-faced 36 year old Albert Rivera, while Podemos’s 37 year old leader Pablo Iglesias sports a rather last-century ponytail.

Only 60-year old Mariano Rajoy, who continues to deny knowledge of massive illegal payments by his party treasurer, Luis Barcenas, clings to power. His party garnered only 27% of the votes versus 38% in 2011. Unfortunately, the abysmal results came too late for him to step aside before general elections due in late autumn.

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The outcome of May 24th means the end of the bipartite system that governed Spain from the advent of democracy 38 years ago and the beginning of endless horse trading between all the parties. In September, there will be elections to the Catalan parliament, and six months from now, general elections. A similar panorama will probably unfold.

Investors who have sold Spanish shares are panicking unduly, for economic policy will remain within a narrow band of the acceptable for three reasons.

Firstly, even in a local election where voters were understandably angry and more likely to experiment, the PP and the PSOE ended up with the most votes. In a general election, that is even more likely to happen. Either of the mainstream parties will need to govern in coalition with Ciudadanos or informally supported by them. A condition of supporting the PP may well be Prime Minister Rajoy’s disappearance and substitution – no bad thing. The distance between the centre-left PSOE and the radical left is as wide as the Grand Canyon; that between PSOE and Ciudadanos is infinitely narrower, and thus Podemos will probably be left out in the cold at a national level.

Secondly, Spain is centrist. Moderation, aspiration and consumption are three words that ring true for the majority.

Last, but not least, Spain’s economic policy is mainly decided in Frankfurt by the European Central Bank and in Brussels by the European Commission.

A couple of years ago, in November 2013, this column advocated investing in Spain. We were right and prices have since gone up. But they have further to go.

*Carmen is not her real name.