Robeco: Marktkommentar, KW29

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Lega waters down flat tax election promise

Speculation on fall of Italian government rises  

Main market events

Peripheral spreads tightened during the week, although on
Friday Italian bonds came under some pressure after speculation on a possible
upcoming fall of the Lega-5-Star government. The supposed deadline is July
20th, to allow for new elections before the Autumn budget round. Last week’s
sell-off in Spanish and Portuguese bonds only lasted for two days as speeches
by ECB members increased the prospects for further stimulus in September.
Italian bonds have returned 8.9% year-to-date, Spanish bonds 8.9%, Portuguese
bonds 8.7% and Irish bonds 6.6%.


The Italian government is considering to introduce a
reduced, flat tax rate of 15% on personal incomes in 2020, but only on the part
of the income in excess of 2019 levels. A flat tax on incomes has been the main
policy pledge of the ruling Lega party. A flat tax rate of 15% on incremental
incomes is estimated to cost just EUR 2bn, as opposed to several tens of
billions if a flat rate on all incomes would be implemented.


Negotiations between the Socialist PSOE and Podemos broke
down this week, as PSOE leader Sanchez refused to give ministerial positions to
Podemos members. This increases the chances of renewed elections around
September. Although PSOE won the 28-April elections, they remain well short of
an absolute majority. Latest polls show PSOE would gain even more seats than in
the 28 April ballot. The Spanish economy continues to ignore the political
uncertainty and seems to weather the slowdown in the rest of Europe well,
thanks to solid growth in the services sector.


Ahead of next week’s ECB meeting, at which
the central bank is expected to pave the way for fresh policy easing in
September, ECB staff seemingly have begun studying a potential revamp of their
inflation goal of “below but close to 2%”.
In his Sintra speech from last month President Draghi already emphasized that
there was conviction at the ECB in pursuing the inflation goal in a “
symmetric”  fashion. That
would allow the ECB to keep inflation above 2% for a while after a period of inflation
weakness, and hence to keep policy accomodative even longer.

Robeco Euro Government Bonds

We used the sell-off in Portuguese bonds to close the
underweight in PGBs. Moreover we bought 4-year Italian inflation-linked bonds.
We believe peripheral risk will remain well supported in the run up to the ECB
meeting next Thursday. After a period of weakness, inflation linked bonds are
expected to gain ground as the ECB steps up its efforts to revive inflation
expectations.  The fund is 42% invested
in peripheral bonds, which is 1% above the level of the index. Year to date the
absolute return of the fund is 7.22%*.

* Robeco Euro Government Bonds, gross of fees, based on Net
Asset Value, 18 July, 2019. The value of your investments may fluctuate. Past results
are no guarantee of future performance.