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Spain ETF Rallies as Independence Worries Ease

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Spanish stocks rallied as Catalan leader Puigdemont refrained from declaring independence from Spain. Worries of a political crisis in Europe abated as Catalan president suspended the secession process to enable talks with Madrid.
 
The Ball is in Madrid’s Court Now
 
Declared illegal by the Spanish government, Catalonia, one of Spain’s 17 autonomous communities, held a referendum on Oct 1 for independence from Spain. Of the 2.3 million votes cast, 2 million backed independence, per government spokesman Jordi Turull (read: How Catalonia Dispute May Impact Spain ETFs).
 
After Catalan leader Puigdemont invited strong criticism for his actions that could potentially destabilize the region, he suspended the results of the vote for a few weeks. “We propose the suspension of the effects of the declaration of independence for a few weeks, to open a period of dialogue” Puigdemont said.  
 
Although he stated that he still intends to secure independence for his region by a common dialogue with Madrid, the Spanish government seems to have the upper hand now.
 
In response, prime minister Mariano Rajoy stated that he will not engage in dialogue regarding Catalan’s separation but was open to talks of constitutional reform. 
 
Rajoy asked the Catalan government to issue a formal statement stating if it has declared independence or not. “This request, before any of the measures that the government can implement under Article 155 of our constitution, aims to offer our citizens the clarity and security that an issue of such importance requires” Rajoy said. This would allow the Spanish government to potentially suspend Catalonia’s home rule.
 
How is Europe Reacting?
 
Catalonia does not hold the right to automatic membership of the EU. Potential talks of a separation led companies to prepare contingency plans in order to leave the region. Moreover, the EU has rejected Catalonia’s independence claim and stated that it will not be a part of the EU outside Spain.
 
French President Emmanuel Macron and German Chancellor Angela Merkel supported Rajoy’s approach in handling this situation. The euro rallied after Puigdemont’s speech.
 
Investors will now be concerned about what lies ahead. What future holds for the relationship between Barcelona and Madrid is difficult to predict and hence a certain degree of political uncertainty still remains.
 
Let us now discuss a few ETFs focused on providing exposure to Spanish equities (see all European equity ETFs here).
 
iShares MSCI Spain Capped ETF (EWP - Free Report)
 
This fund seeks to provide exposure to large and mid-cap equities in Spain.
 
The fund manages AUM of $1.03 billion and charges 48 basis points in fees per year. Financials, Industrials and Utilities are the top three sectors of the fund, with 42.4%, 17.1% and 11.8% allocation, respectively (as of Oct 11, 2017). From an individual holdings perspective, the fund has high exposure to Banco Santander SA, Banco Bilbao Vizcaya Argentaria and Telefonica SA, with 19.8%, 10.1% and 8.6% allocation, respectively (as of Oct 11, 2017). It has returned 26.0% year to date and 26.6% in a year (as of Oct 12, 2017). EWP currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. 
 
Let us now compare the performance of this ETF to a broader Europe based ETF, FEZ.
 
SPDR EURO STOXX 50 ETF (FEZ - Free Report)
 
This fund seeks to provide exposure to equities in the European region.
 
The fund manages AUM of $4.53 billion and charges 29 basis points in fees per year. From a geographical perspective, the fund has high allocation to France, Germany and Spain, with 36.2%, 33.1% and 10.4% exposure, respectively (as of Oct 11, 2017). Financials, Industrials and Consumer Discretionary are the top three sectors of the fund, with 22.6%, 13.4% and 11.4% allocation, respectively (as of Oct 11, 2017). From an individual holdings perspective, the fund has high exposure to Total SA, Siemens AG and Bayer AG, with 4.7%, 4.1% and 3.9% allocation, respectively (as of Oct 11, 2017). It has returned 24.0% year to date and 27.1% in a year (as of Oct 12, 2017). FEZ currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
 
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Spanish stocks rallied as Catalan leader Puigdemont refrained from declaring independence from Spain. Worries of a political crisis in Europe abated as Catalan president suspended the secession process to enable talks with Madrid.
The Ball is in Madrid’s Court Now
Declared illegal by the Spanish government, Catalonia, one of Spain’s 17 autonomous communities, held a referendum on Oct 1 for independence from Spain. Of the 2.3 million votes cast, 2 million backed independence, per government spokesman Jordi Turull.
After Catalan leader Puigdemont invited strong criticism for his actions that could potentially destabilize the region, he suspended the results of the vote for a few weeks. “We propose the suspension of the effects of the declaration of independence for a few weeks, to open a period of dialogue” Puigdemont said.  
Although he stated that he still intends to secure independence for his region by a common dialogue with Madrid, the Spanish government seems to have the upper hand now.
In response, prime minister Mariano Rajoy stated that he will not engage in dialogue regarding Catalan’s separation but was open to talks of constitutional reform. 
Rajoy asked the Catalan government to issue a formal statement stating if it has declared independence or not. “This request, before any of the measures that the government can implement under Article 155 of our constitution, aims to offer our citizens the clarity and security that an issue of such importance requires” Rajoy said. This would allow the Spanish government to potentially suspend Catalonia’s home rule.
How is Europe Reacting?
Catalonia does not hold the right to automatic membership of the EU. Potential talks of a separation led companies to prepare contingency plans in order to leave the region. Moreover, the EU has rejected Catalonia’s independence claim and stated that it will not be a part of the EU outside Spain.
French President Emmanuel Macron and German Chancellor Angela Merkel supported Rajoy’s approach in handling this situation. The euro rallied after Puigdemont’s speech.
Investors will now be concerned about what lies ahead. What future holds for the relationship between Barcelona and Madrid is difficult to predict and hence a certain degree of political uncertainty still remains.
Let us now discuss a few ETFs focused on providing exposure to Spanish equities (see all European equity ETFs here).
iShares MSCI Spain Capped ETF (EWP - Free Report)
This fund seeks to provide exposure to large and mid-cap equities in Spain.
The fund manages AUM of $1.03 billion and charges 48 basis points in fees per year. Financials, Industrials and Utilities are the top three sectors of the fund, with 42.4%, 17.1% and 11.8% allocation, respectively (as of Oct 11, 2017). From an individual holdings perspective, the fund has high exposure to Banco Santander SA, Banco Bilbao Vizcaya Argentaria and Telefonica SA, with 19.8%, 10.1% and 8.6% allocation, respectively (as of Oct 11, 2017). It has returned 26.0% year to date and 26.6% in a year (as of Oct 12, 2017). EWP currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. 
Let us now compare the performance of this ETF to a broader Europe based ETF, FEZ.
SPDR EURO STOXX 50 ETF (FEZ - Free Report)
This fund seeks to provide exposure to equities in the European region.
The fund manages AUM of $4.53 billion and charges 29 basis points in fees per year. From a geographical perspective, the fund has high allocation to France, Germany and Spain, with 36.2%, 33.1% and 10.4% exposure, respectively (as of Oct 11, 2017). Financials, Industrials and Consumer Discretionary are the top three sectors of the fund, with 22.6%, 13.4% and 11.4% allocation, respectively (as of Oct 11, 2017). From an individual holdings perspective, the fund has high exposure to Total SA, Siemens AG and Bayer AG, with 4.7%, 4.1% and 3.9% allocation, respectively (as of Oct 11, 2017). It has returned 24.0% year to date and 27.1% in a year (as of Oct 12, 2017). FEZ currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
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