Politics will be key for European markets in 2017 as a series of upcoming high-profile elections begins to shift money management executives' focus away from the monetary policy debate that has occupied them for the past few years.
Next year the Netherlands, France and Germany face elections, and Italy might call one. While money management executives are split on which of those countries will have the most impact on global markets, they are in agreement that political risk will take center stage — particularly since certain outcomes might see the risk of a breakup of the eurozone resurface.
Central banks will no longer be setting the agenda for European markets, said David Riley, head of credit strategy at BlueBay Asset Management LLP, London. “Politics will be setting the agenda for Europe. After a couple of years where it has very much been the European Central Bank dominating financial markets ... now they are going to be in reactive mode. Agendas will be set by domestic politics, and what is happening in the rest of the world.”
All eyes will be focused on whether the recent populist wave, highlighted by the decision by U.K. voters in June to leave the European Union and the election of Donald Trump as president of the U.S., will continue.
The series of elections in Europe kicked off Dec. 4, with an Italian referendum resulting in the resignation of Prime Minister Matteo Renzi, seen as a further example of populism, and a presidential vote in Austria, which saw a rejection of a populist candidate.
While the success of left-leaning Alexander Van der Bellen in Austria was welcome, it has thrown even more uncertainty into the political cycle.
“After the U.S. election we thought we had set upon a winning strategy of always predict a populist outcome,” said Eric Lascelles, Toronto-based chief economist at RBC Global Asset Management. “We are back to square one, recognizing the strength of populist forces ... but probably a little less smug in our ability to predict populist outcomes.”
That is a serious consideration for the busy 2017 election calendar in Europe. In March, Dutch general elections will take place, with a number of populist candidates in the running. The French presidential election in April will see far-right candidate Marine Le Pen take on candidates including current favorite Francois Fillon, a former prime minister and a conservative. The German people will vote in a federal election in the second half of next year, with current Chancellor Angela Merkel taking on a number of other parties.
“I have to think there is a possibility that populist discontent manifests itself in unwelcome election outcomes next year,” said Mark Burgess, London-based chief investment officer at Columbia Threadneedle Investments.
Germany is less of a concern than other European countries facing elections, with the view Ms. Merkel will triumph “but will have her power clipped by a less successful outcome than historically,” said Mr. Burgess.
The consensus among money management executives is that victory for Ms. Le Pen in France is unlikely, although Mr. Burgess noted Mr. Fillon's conservatism might make it difficult for the center to coalesce behind him and stop Ms. Le Pen. “And after (Mr.) Trump, I believe anything is possible. That would be very concerning,” he said.