Focus on Europe

This year, the stage is set for some of the most important political events in Europe for decades, with several key elections in the pipeline. We look at some of the key events happening this year and explain what potential changes in Europe could mean for investors.

  • 10/01/2017

A series of elections and the possibility of referendums across Europe are expected to rattle stock markets in 2017, so investors should make sure they are prepared for potential volatility.

The result of the Italian referendum was the latest event to cause turmoil in Europe, when in December citizens refused to give the green light to reform the country’s political system. Prime minister Matteo Renzi1 resigned following the defeat and has been succeeded by the Italian foreign minister, Paolo Gentiloni, with consensus growing that a general election may be held early in 2017, prior the natural end of the parliamentary term in 2018.

Political uncertainty is compounded by the crisis in the Italian banking sector due to bad loans, with UniCredit, the country’s largest bank, last month announcing plans to raise €13 billion in a share issue in an attempt to shore up its reserves.2 The European Central Bank (ECB) recently told Italian officials that Monte dei Paschi di Siena (MPS), Italy’s third largest bank, will need €8.8 billion in fresh capital, much more than the €5 billion target the bank had been seeking following bank stress tests last summer. Stabilising the banks is likely to prove difficult for the Italian Government, which faces widespread opposition to a taxpayer-funded bailout.

France and Germany are definitely going to the polls this year, with fears that their election results may further destabilise Europe if the status-quo is shaken up by emerging challengers.

French elections

French citizens will vote for President François Hollande’s successor in spring 2017. National Front leader Marine Le Pen and Republicans’ candidate François Fillon are the two main contenders to become France’s next President.3 A victory for Le Pen could have major implications for the whole of Europe, given she has promised a “Frexit” vote within six months if she wins.4

The French election is therefore a key event for the global economy and stock markets, which may become increasingly jittery as the election approaches, given that the outcome will be critical to the survival of the EU. If France were to vote to leave the EU, this would arguably be a much bigger blow to the European project than Brexit, given France’s historical closeness with European ideals and membership of the Euro.

Whoever wins, the result will signal a new era of right-wing politics for France after decades of centrism.

German elections

Germany’s federal election is another key political event in 2017. The earliest possible date to elect members to the Bundestag - the federal parliament of Germany - is August.

Current Chancellor Angela Merkel has decided to run, but expects the election to be a tough one.5 It is possible that the same ‘grand coalition’ government will emerge, but there appears to be an impending power shift. Far-right party the Alternative for Germany (AfD) has increasing public support in polls, albeit still on the fringe. The liberal Free Democrats have also gained momentum since defeat in 2013.6

Major parties may shrink in representation, with the Bundestag able to hold Merkel back or sway the outcome of subjects ranging from Brexit to the future of the EU. Markets dislike uncertainty, and this is another major election where political risk could affect performance, particularly given Merkel’s long tenure and extraordinary sphere of influence across many aspects of European and global policy.

The Netherlands

In the Netherlands, far-right leader Geert Wilders is tipped to become the next Prime Minister in the March elections. Among his policies, he has vowed to call a referendum on Dutch EU membership and end immigration from Muslim countries.7

However, rhetoric doesn’t always translate into policy and the Dutch economy is set grow by 2.1% next year, according to the government’s forecast, with the country anticipated to be among Europe’s better performers in 2017.8

Brexit

The Brexit vote in the UK dealt a heavy blow to confidence across Europe. It is as yet unknown what deal the other 27 member states will give the UK when negotiations commence once Article 50, the formal mechanism for leaving the EU, is triggered. However, the fortunes of the EU are as much tied to a good Brexit deal as the UK’s.

London is renowned as an important financial centre in the EU, and as the governor of the Bank of England Mark Carney warns, it is essentially the “investment banker for Europe”.9 This makes it important that there is an “orderly transition” for the continent’s stability, says Carney. However, the terms for separation are far from agreed and Brexit is adding uncertainty to the overall picture in Europe, which markets dislike.

Prepare for uncertainty

Whatever volatility lies ahead, investors should try to maintain a suitably diversified portfolio. This means holding, for example, a combination of bonds, equities, property, commodities and cash.

Doing this can help reduce your exposure to risk and any stock market storms brought on by political uncertainty in Europe.

Remember too, that if markets are volatile, selling in a panic will only crystallise your losses. If you are able to sit tight, however, you may be able to benefit from any possible recovery, although there are no guarantees that markets will bounce back from any significant falls.

Investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.

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