Spanish voters head to the polls on Sunday in a snap national election unlikely to produce a working majority for any single party, heralding uncertainty for markets.
The country's fiscal policy, banks and green energy transition are in focus, and any protracted political deadlock could dent Spanish stocks (.IBEX) up 15% so far this year.
Here are five key questions for investors.
WHAT ARE MARKETS WATCHING?
How quickly a new government can be formed. In 2019, it took current Prime Minister Pedro Sanchez two elections to form an administration.
"The Spanish market, like all equity markets, hates ambiguity," said Steve Smith, Invesco European equities fund manager.
ING economist Wouter Thierie said prospects of more political uncertainty were a concern, "although that is not my base case."
Georgios Leontaris, chief investment officer EMEA at HSBC Private Bank, said post-election discussions on the budget and taxation mattered for bond markets.
The Spanish/German 10-year bond yield gap is at 104 bps , little changed from where it stood when Sanchez called the July 23 election in late May, and more stable recently than Italy's and Greece's.
WHAT DOES THE ELECTION MEAN FOR THE ECONOMY?
Spain's economy has held up relatively well but is slowing from a post-pandemic rebound. The government forecasts 2023 growth of 2.1% versus 5.5% last year.
A slowdown means Spain's high debt of above 100% and deficit of 4.8% of GDP are in focus, and drawn out talks to form a government could slow the progress of fiscal reforms and worsen its finances.
ING's Thierie said the next government would have to tackle Spain's high debt, noting that tighter EU fiscal rules come into force in 2024.
WHY IS SPAIN'S GREEN TRANSITION IN FOCUS
With Spain getting drier and hotter, energy has been a major election topic and the two main parties have different views about how to decarbonise the economy.
Sanchez's government upped its green energy target, proposing that renewables generate 81% of electricity by 2030.
The opposition PP wants to extend the life of nuclear plants beyond their 2027-2035 closure window. If this comes with operator revenue guarantees, it would be well received by utilities, JPMorgan said.
Brokerage Renta 4 said a PP proposal to introduce a fee on renewable energy projects would be negative for the sector's firms.
WHAT ABOUT THE BANKS?
Investors are watching what happens to a two-year, 4.8% levy approved in December on banks' net interest income and net commissions above 800 million euros ($880 million).
Bosco Ojeda, head of small and mid-cap research at UBS, said the PP could favour an early end to the tax, intended to raise 3 billion euros ($3.3 billion) by 2024.
"It's quite likely the levy could be removed, (though) maybe not immediately ... and that could be seen as a positive for banks," Ojeda said.
An index of Spanish bank stocks is up almost 20% this year. (.IBEXIB)
ANY IMPLICATIONS FOR THE EUROPEAN UNION?
Potentially. Spain just took over the six-month rotating EU Council presidency and legislation such as new fiscal rules needs approving.
Federico Santi, senior analyst, Europe at Eurasia Group, said the elections would "interfere" with Spain's EU presidency and limit its ability to effectively steer the EU agenda.
"A likely change in government could spell trouble for several measures...," he said. "Environmental legislation is the most at risk."
($1 = 0.9072 euros)
