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Dutch elections first test for Europe, say BNY Mellon fixed income experts

28 February 2017

Newton fixed income head Paul Brain and Insight manager Gareth Colesmith warn of the populist impact in key general elections on the continent in the coming months.

By Rob Langston,

News editor, FE Trustnet

With elections in the Netherlands, France and Germany set to take place later this year against a backdrop of increased support for populist political movements, fixed income specialists Paul Brain and Gareth Colesmith give their outlook.

The first test for the European status quo will be the Dutch general elections, in which populist politician Geert Wilders has remained one of the frontrunners throughout the campaign.

As one of the founding members of the EU and one of the few eurozone countries to have emerged from past crises relatively unscathed, the prospect of a victory for a controversial populist who has previously backed a Dutch exit from the trading bloc is significant.

Paul Brain, head of fixed income at BNY Mellon subsidiary Newton Investment Management, said: “The forthcoming Dutch election is, in some ways, a very significant test for the eurozone, and yet perhaps not.

“The leader of the PVV party Geert Wilders has been very anti-EU and the eurozone. Given that his party has been leading the opinion polls this poses a risk to the establishment in Europe.”

He added: “That being said, he doesn't appear to be able to gain a sufficient majority of the vote to lead without the support of other parties.

“Here is where the risk could subside as most of the other parties have so far refused to contemplate a coalition that includes the PVV.”

Performance of Dutch government bond vs European government bond indices over 5yrs

 

Source: FE Analytics

Brain said: “The risk that the market doesn't appear to consider is that excluding the biggest party – by share of vote – from forming a government could be very divisive for the country as a whole.

“At the very least, we would expect the new coalition to take notice of the anti-immigration sentiment and also to be tougher on closer integration of Europe.”


Elsewhere, the French presidential elections have posed another potential headwind for the Europe watchers.

Incumbent Francois Hollande has decided against standing for re-election, opening up the field for other challengers while right-wing politician Marine Le Pen has emerged as an early favourite.

However, Gareth Colesmith, senior portfolio manager at BNY Mellon subsidiary Insight Investment, says the likelihood of a victory for French right wing populist Marine Le Pen is unlikely.

He said: “In France, should the National Front leader Marine Le Pen find success in the presidential election it could mean the end of the EU.

“While she currently has a narrow lead in the first round, she has a low probability of winning in the second.”

He added: “Of her most likely rivals, both the centrist independent candidate Emmanuel Macron - in our view the current favourite - and republican candidate François Fillon both have a strong margin of support against her in a one-on-one contest.

“Her least difficult route to power would be against the leftist socialist candidate Benoit Hamon.”

However, Brain concedes that there is a “risk that the market is too complacent”, noting that Fillon and Macron could inadvertently help Le Pen’s chances by attacking each other.

He said: “If this goes too far, or if they are too tarnished by scandal, then it may be hard for them to form an alliance against Le Pen in the second round.”

Brain added: “For the time being the likely scenario is that both of the 'danger' candidates in both elections do not make it into power.

“That being said their influence on ongoing policies will be greater and the EU could face another challenge later in the year.”


In Germany, Insight manager Colesmith says the federal election poses less of a threat to the EU from a political risk perspective.

He said: “In our view, either Angela Merkel will retain leadership or a left-of-centre coalition including the SDP, Green Party and Left Party – all of which support mainstream, pro-European policies – will govern.

“The SDP has notably seen a boost in polling support, owing to its new energetic leader Martin Schulz, former president of the EU parliament.

“The most popular separatist movement is the Alternative for Deutschland. While likely to win its first Bundestag seats, it will likely remain a fringe party.”

Colesmith added: “We expect the outcome of all three political risk events this year to be relatively benign for investors.

“However, episodes of volatility will be almost inevitable and so there will be opportunities for active fixed income investors to take advantage of relative value opportunities in euro sovereign debt markets in particular.”

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