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Politics Takes Centre Stage

1 December 2016 by Mark Holman

If anyone is looking for an appetiser for what 2017 may bring us from a markets point of view, this weekend could be the perfect case study as politics takes centre stage.

In Austria we have a re-run of the presidential election where Norbert Hofer the leader of the far right Freedom Party of Austria is standing against Alex van der Bellen of the Green Party. Polls suggest there is very little to choose between the two candidates, however from a market standpoint, a victory for Hofer would not be well received as he intends to be a “hands on” president and harbours amongst other things, a number of anti-EU views.

In Italy we have the referendum on constitutional reforms on Sunday which, although being reformist, have ended up being a vote on prime minister Matteo Renzi himself. Renzi has found himself fighting all corners, including the popular Beppe Grillo of the Five Star Movement, who is also seen as less pro-EU. Renzi has threatened to resign should he not win this referendum, and with polls predicting such a defeat, there are justifiable fears that market-friendly reforms will be shelved; including the recapitalisation plans for a number of the weaker Italian banks.

Monday morning therefore has the potential to make some very interesting reading, and whilst these two political events themselves should not be seen as anywhere near the type of threat that we had from the UK referendum in June, the headlines will likely extrapolate some disconcerting scenarios.

Fortunately, just like in June and also in November for the US presidential election, these are known events and we have time to adapt our portfolio hedging strategy. Our take is that the situation in Austria is a real 50/50 outcome, but in Italy Renzi will most likely lose. The initial market reaction to this is expected to be poor, especially for the Italian banks and probably the insurers. However, we think the reaction could be short lived. Just like with Donald Trump last month, there is plenty of cash on the sidelines that will seek to be invested by year end, and secondly we have the ECB Governing Council meeting on Wednesday and Thursday, after which we expect Mario Draghi to extend the current €80bn per month QE programmes by another 6 months. We further think that with a backdrop of weak European news and the unintentional recent tightening, he will refrain from any taper talk at this stage.

Having said that, with this being a potential known negative, it makes perfect sense to implement shorter term hedging policies where mandates allow.



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