It looks like being a close call between the two leading candidates in a proportional ballot featuring 30 different parties. Geert Wilders, standing for the anti-Islam and anti-EU Freedom Party (PVV) and Mark Rutte, the centrist democratic Prime Minister, are neck and neck in the polls. Even if the extreme right PVV wins, it may not be part of a future coalition government. Investors are obviously interested to see who wins but even keener to see some resolution of the debate over the Netherlands quitting the European Union. The country’s current legislation does not allow a referendum on the subject.
The March 15 election will be a genuine test of how strong Europe’s extreme right wing parties actually are and a gauge for upcoming elections in other countries. Markets would be reassured if Geert Wilders’ party scored less than expected. In a little over a month, France will vote in the Presidential elections. Unlike the Brexit vote or Donald Trump’s election, France will vote in two rounds, a system which investors hope will prevent Marine Le Pen, the extreme right candidate, from winning. But even if she were elected, Frexit would not be automatic as it would first require a referendum and also because parliamentary elections are scheduled for June.
Despite this political uncertainty, we are still structurally positive on equity markets but have tactically reduced exposure. We worry that today‘s particularly enthusiastic markets are insufficiently discounting political risk. As for fixed income markets, French and Italian government bond spreads have become more volatile and European swap spreads have widened. Any surge in political concerns in these two G7 countries could well have a material impact across all markets. In coming months, investors will be focusing increasingly on anticipating events and hedging positions.