28-Jul-23 Macro

When politics no longer shock

We draw some broad lessons from Spain’s inconclusive elections on how to think about politics in Southern Europe since the 2008 global financial crisis.

Southern European stock market returns in comparative perspective since 2009

Sources: DWS Investments GmbH, Bloomberg Finance L.P. as of 7/26/23

None of this generated much of a market reaction at the Madrid stock exchange.[1] During the campaign, Alberto Núñez Feijóo, the PP’s current leader, had already dampened hopes that he would scrap, rather than overhaul a windfall tax on banks and energy companies.[2]

In other words, it appears there was not all that much at stake, one way or the other, for investors in Spanish equities. That, however, is in itself a big change with some important, more broadly applicable messages. These are highlighted by our Chart of the Week, which looks at the performance of stock market returns in Spain, Italy and Greece over the past 15 years. As it shows, politics can matter for quite long stretches, if things get bad enough. Greece, in particular, has amply demonstrated that not every nasty political surprise is an opportunity to immediately buy the dip – as our chart shows.

Especially for comparatively small countries, we believe one way to deal with these risks (as with others) is to diversify, potentially combining for example, stocks from all over Europe. For a decade or so after the 2008 global financial crisis, Southern European stock markets[3] embarked on a tumultuous journey, facing unprecedented challenges, substantial volatility, and significant underperformance. Recent years, however, suggest that after suffering long enough, patience eventually may get rewarded. In democratic and open societies that manage to remain so, politics can eventually become less scary, even after major shocks. Over time, economies, policymakers, and voters tend to learn how to cope through trial and error.[4]

For investors, spotting such political turning points, before a more sanguine view becomes the new conventional wisdom about a country, could potentially be a significant source of medium-term outperformance. As politics receded into the background, stocks in all three countries have been catching up again. In our view, seeing medium-term trends is not all that hard. For example, back in 2019, we wrote that “Political science suggests that under Spain's current electoral system, we will eventually see the emergence (or re-emergence) of two big parties plus a regional fringe.”[5] Such thinking has served us well during the last few years, not just in forecasting election results.


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1. Spain faces uncertain political future after election deadlock | Financial Times

2. Spanish election favourite Alberto Núñez Feijóo vows to overhaul windfall tax | Financial Times (ft.com)

3. Here we are referring to the Spanish, Italian and Greek stock markets

4. Popper, K. (1995), The Open Society and Its Enemies, Golden Jubilee Edition, esp. 442-453

5. Spain's crucial elections (dws.com)

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