Dive and conquer

Catalan poll result messier than investors think

Catalonia's big say on independence has produced a messy result. Pro-independence parties won 47.8 per cent of the vote in a September 27 poll, enough to secure a majority of seats in the regional parliament and claim victory. But they failed to win the kind of backing that would make investors fear an imminent breakup of Spain.

It's easy to see why Spanish 10-year bond yields fell on September 28. The radical Popular Unity Candidacy (CUP) and the "Together for Yes" platform -made up of the centre-right Catalan Democratic Convergence party, the Catalan Republican Left and other separatists - got less than 50 per cent of the votes in a record 77 per cent turnout. While the winning parties say they will press ahead with their plan to secede unilaterally within 18 months, the result greatly weakens their mandate to pursue secession with Spain unilaterally. What's more, unilateral independence is still unlikely anyway given various political and legal hurdles.

Still, investors should not become complacent. The result strengthens separatists' negotiating hand with Spain, due to hold the national election in December. Catalonia's new parliament will be more radical. Together for Yes platform won 62 seats - six short of the majority - and so must rely on the 10 seats secured by the more radical CUP, which advocates an immediate rupture with Spain. The new regional government will likely be formed by a hodge-podge of right, left, green and radical parties. That does not bode well for a smooth functioning of Spain's second most populous region.

The read-across for the upcoming national election is limited by the plebiscite nature of the poll. Even so, the result should worry Spain's ruling PP party, which garnered just 8.5 per cent of the vote. The pro-market centrist party Ciudadanos came in second with nearly 18 per cent of the vote, with the socialists securing third place. Both did better than expected. A Podemos-backed coalition, meanwhile, did little better than the PP.

A Spanish break-up still looks distant. But the polls show a divided Catalonia and that political noise will persist. Investors should see the risk as becalmed rather than removed.