Dutch elections have been in focus this week amid investor concerns that populism is set to overhaul the established political order in Europe. Investment Manager Robin Kyle assesses the extent to which the result provides guidance for other major Eurozone elections in 2017.
It’s not often that politics in Holland should capture the attention of global markets but that has been the case this week. With concerns that Trump’s victory in the US should be the precursor to a populist uprising in Europe, the Dutch election was viewed as providing an important barometer of current sentiment. While party dynamics and electoral systems dictated that any threat of an impending “Nexit” remained low, the result was also thought to provide some guidance on Marine Le Pen’s chances in the forthcoming French elections, still considered to be the major political risk in Europe.
In Holland, the role of pantomime villain (from a market standpoint) has been played by Geert Wilders, whose Freedom Party had been expected to garner the largest number of seats. Polls had suggested that the party’s protectionist manifesto was set to yield c.30 of 150 seats, ahead of the VVD, led by incumbent Prime Minister Mark Rutte. In the event, it was the VVD who polled the largest share, taking 33 seats to the Freedom Party’s 20. While the result marked an increase of 8 seats for the far right, it nonetheless marked a clear victory for the centre, ending a dramatic week in Holland that included a diplomatic spat with Turkey’s President Erdogan.
Dutch politics aside, the real question from an investor’s point of view is the extent to which the result may be viewed as prophetic of other major European elections. While Mr Wilders chose to dwell on the positives of increased seat numbers, the result can be interpreted as an indication that populism is falling from favour. The Dutch electoral system may be viewed as an accurate gauge of sentiment, with the percentage of votes cast equalling percentage of seats won (an approach, it should be added, that would have seen Donald Trump lose out to Hillary Clinton in the US). In France, elections also focus on a President rather than a Parliament, with Marine Le Pen’s National Front having to negotiate tricky two round elections at a later date in order to win enough seats to force any question of “Frexit”.
The above analysis is not intended to downplay the political risks in Europe. The idiosyncratic risks attached to the determination of France’s next President are acute, particularly as the nation continues to heal from the wounds of 2015’s terrorist attacks in Paris. The once-favoured Francois Fillon has seen his campaign tarnished by scandal, while centrist Emmanuel Macron, a former investment banker, may be viewed in some quarters as a poster boy for the establishment. However, with a number of these risks priced into European equities, we continue to believe that there are opportunities in the right exposures. Taking a step back from the politics, fundamental data is improving, a fact recognised by ECB President Mario Draghi in his statement last week. Our preferred European exposures focus on “value” names that are better placed to ride out any volatility and profit from a cyclical recovery over the longer-term.