24 January 2017 by Pierre Beniguel
2017 has understandably been dubbed the year of uncertainty – and with good reason – as the political agenda dominates investor concerns. However, since the start of the year markets have been relatively strong with demand comfortably absorbing the level of new issuance to date, while secondary spreads have generally continued to grind tighter. This morning (the 24th of January 2017), the crossover index was almost flat compared to its 2016 closing level of 289bps. Against this, Donald Trump only took office last Friday, and this could be only one of many political sources of volatility as we navigate through the year. In Europe, the political calendar will be particularly active, kicking off with the French ‘Parti Socialists’ staging the second round of their primary this weekend. We thought this would therefore be an opportune time to share our thoughts on how the markets could react ahead of the key French and Dutch elections that will take place in H1-2017.
In France the race to the Presidential seat is a drawn out affair; last weekend we saw the first round of the Parti Socialiste primary with the second round being completed on Sunday between Benoit Hamon and Manuel Valls who, despite both being socialists, have very different visions of the policies needed to guide France, with Valls adopting a more liberal view and Hamon a staunch socialist. This is dividing the party faithful which is very different from the centre-right party of the ‘Les Republicains’ where Francois Fillon ran a very successful campaign and is a leader of a united party. The other party leader with full support of the rank-and-file of course is Marine Le Pen of the National Front party.
The French election is a two stage election: The first round is due to take place on 23rd of April, with the second round on the 7th of May. So far, the French electorate can expect about 10 candidates to choose from. Recent polls suggest that Hamon or Valls would finish fifth at the first round, behind left-centrist Macron and far-left Melenchon. With just three months to go before this first round of the presidential election, it is difficult to comprehend how the Parti Socialiste will manage to build momentum behind its candidate. So at present, the general consensus is for Fillon and Le Pen to reach the second round and battle it out for the occupancy of the Elysee Palace. Although it should be noted that Macron has been well received and there is growing support for his candidacy so him making it to the second round should not be totally discounted.
With three months to go until the first round, the election results remain uncertain. From a market perspective we view the main risk to the election as Marine Le Pen succeeding; but at this stage it is too early to call, and hedging against potential market volatility should be considered only nearer to the election itself.
Before that, though, the Dutch election will take place on the 15th of March. Similar to the French election, there will be a large number of parties and party leaders hoping to become Prime Minister. In the current Dutch parliament there are 11 different parties represented via proportional representation; with the current PM’s party (VVD) having just 41 seats out of the 150 seat parliament. The Dutch election is a one round election, and as it is based on proportional representation the elected MPs have to form a government. We should therefore expect a coalition to be formed for a government and a PM to emerge. Far right PVV leader Geert Wilder is currently expected to gain 25% of the votes at the election and become the largest party in the Dutch parliament. However, he will need to find allies and form a coalition if he wishes to become PM. Current PM, Mark Rutte (People’s Party for Freedom and Democracy) ruled out any coalition with Wilder’s Party for Freedom who will undoubtedly have difficulties partnering with other major parties as many have already opposed working with the nationalists. Wilder is therefore likely to find his route to becoming PM obstructed.
Taking a positive perspective, the unrest emanating from the Political agenda is anticipated by markets: anti-establishment votes and the rise of populism has already fuelled market concerns in the forthcoming elections of 2017, and so victory by far right parties in France and Netherlands will not be a complete surprise, although the likelihood of Le Pen or Wilder achieving the top job is still regarded as low risk. For that reason, the near term uncertainty remains low and the strength of market technicals balances out investor caution, but we do expect market nervousness to pick up as we get closer to the election dates and so we continue to focus on high conviction and relative value stock selection.
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