European Elections Bring Uncertainty for Institutional Investors

The Netherlands, France and Germany will hold elections leveraging populist influence.

Few things roil the markets like political uncertainty and potential upheaval. With a slate of impending European elections where the outcome is anything but assured, institutional investors and asset managers may be looking for ways to play the political uncertainty hanging over Europe.

It’s shaping out to be an eventful 2017 in Europe, as the Netherlands, France, and Germany will hold national elections in which populist parties, and anti-European Union candidates, hope to take power and upset the natural order of business and politics.

The surprise yes vote for Brexit, and the election of Donald Trump as U.S. president has buoyed the confidence of populist parties throughout Europe. As a result, investors and market watchers are bracing themselves for the possibility of more of the unexpected.

The Netherlands will kick it off with a general election on March 15. Geert Wilders, leader of the far-right Party for Freedom (PVV), has pledged to leave the E.U. Polls currently show Wilders leading all other candidates, and with twice as many votes as garnered during the last election in 2012.

However, it’s not likely the PVV will reach a majority, and most Dutch political parties have said they won’t form a coalition with them. Polls indicate that at least four parties will be needed to form a governing coalition.

Dutch bank Rabobank suggested in a note last week that the investment play for the Netherlands election is to go long on Dutch bonds, reports CNBC.

“In underlining the threat populism poses as regards euro zone integrity, strong support for the PVV … stands to underpin core bonds including, paradoxically, DSLs (Dutch State Loans),” said Rabobank.

However, the bank cautioned that “several factors could contribute to a further rise of Eurosceptic parties in the Netherlands.”

While Rabobank suggested going long on Dutch bonds, it wasn’t as confident about French bonds, also known as Obligations Assimilables du Trésor

France will hold its first round of elections April 23, and the second round on May 7. The two main candidates for president are Marine Le Pen of the right wing National Front party, and The Republican’s Francois Fillon. Le Pen has promised that if elected he’d hold a Brexit-style referendum for France to leave E.U. Polls have Fillon with a narrow lead over Le Pen, but suggest that Le Pen will make it to the second round of voting in May.

“Go long DSLs vs. OATs,” said the bank. “The read across is likely to be more negative for OATs both as Le Pen’s fortunes are reassessed, and as the outlook for the euro zone cohesion is challenged.”

Germany won’t be holding its elections until September when Chancellor Angela Merkel, who leads the Christian Democratic Union of Germany party (CDU), will run for a fourth term. Merkel has faced a backlash over her open-door migrant policy, and is up against a surging Alternative for Germany party (AfD), which also supports leaving the E.U. A defeat for Merkel could mean a referendum on E.U. membership, and strict border controls.

Although the AfD isn’t expected to unseat Merkel, German public sentiment could change based on the outcomes of the French and Dutch elections. Last week, Germany’s Economy Minister Sigmar Gabriel said the E.U. could disintegrate if populists win in France or the Netherlands.

“The French presidential elections this spring are bitter fateful elections for Europe,” Gabriel told the Bundestag lower house of parliament.  “If enemies of Europe manage again in the Netherlands or in France to get results, then we face the threat that the largest civilization project of the 20th century, namely the European Union, could fall apart.” —Michael Katz

Related Link: The Post-Brexit Market

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