Although the Dutch election result has calmed fears of a continental wave of far-right victories, We expect European equities to remain volatile — and risky — in the run-up to the French elections.
As far as financial markets are concerned, the Dutch elections on 15th March were a bit of damp squib. Prime Minister Mark Rutte’s VVD party is set to lead a new coalition, while the far-right PVV party only gained three seats — well below what was expected some months ago. That said, forming a government with five parties will prove difficult. However, fears of successive far-right victories across the continent have been calmed for now.
The next key European political event is the first round of the French presidential elections on 23rd April. It looks certain that Republican candidate François Fillon will be eliminated, leading to a two-horse final-round race between Front National’s Marine Le Pen and independent Emmanuel Macron on 7th May.
Financial markets expect a Macron victory, reflected by very low volatility in European markets. However, there’s less optimism in the bond markets, where French government debt trades at a discount to German debt.
Volatility of emerging markets vs Eurozone stock prices (rolling six-months annualised)
This heightened European political risk is a key reason why we currently hold only small exposures to European equities in our portfolios. Although European equities have a useful high ‘beta’ to global trade cycles, we can own this in other ways, such as through emerging market equities, without taking unnecessary — and under-priced — European political risk.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
Sources: Bloomberg and Macrobond