European Elections Bring Uncertainty for Institutional Investors

Few things roil the markets like political uncertainty and potential upheaval. With a slate of impending European elections where the outcome is anything but assured, institutional investors and asset managers may be looking for ways to play the political uncertainty hanging over Europe.

It’s shaping out to be an eventful 2017 in Europe, as the Netherlands, France, and Germany will hold national elections in which populist parties, and anti-European Union candidates, hope to take power and upset the natural order of business and politics.

The surprise yes vote for Brexit, and the election of Donald Trump as U.S. president has buoyed the confidence of populist parties throughout Europe. As a result, investors and market watchers are bracing themselves for the possibility of more of the unexpected.

The Netherlands will kick it off with a general election on March 15. Geert Wilders, leader of the far-right Party for Freedom (PVV), has pledged to leave the E.U. Polls currently show Wilders leading all other candidates, and with twice as many votes as garnered during the last election in 2012.

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However, it’s not likely the PVV will reach a majority, and most Dutch political parties have said they won’t form a coalition with them. Polls indicate that at least four parties will be needed to form a governing coalition.

Dutch bank Rabobank suggested in a note last week that the investment play for the Netherlands election is to go long on Dutch bonds, reports CNBC.

“In underlining the threat populism poses as regards euro zone integrity, strong support for the PVV … stands to underpin core bonds including, paradoxically, DSLs (Dutch State Loans),” said Rabobank.

However, the bank cautioned that “several factors could contribute to a further rise of Eurosceptic parties in the Netherlands.”

While Rabobank suggested going long on Dutch bonds, it wasn’t as confident about French bonds, also known as Obligations Assimilables du Trésor

France will hold its first round of elections April 23, and the second round on May 7. The two main candidates for president are Marine Le Pen of the right wing National Front party, and The Republican’s Francois Fillon. Le Pen has promised that if elected he’d hold a Brexit-style referendum for France to leave E.U. Polls have Fillon with a narrow lead over Le Pen, but suggest that Le Pen will make it to the second round of voting in May.

“Go long DSLs vs. OATs,” said the bank. “The read across is likely to be more negative for OATs both as Le Pen’s fortunes are reassessed, and as the outlook for the euro zone cohesion is challenged.”

Germany won’t be holding its elections until September when Chancellor Angela Merkel, who leads the Christian Democratic Union of Germany party (CDU), will run for a fourth term. Merkel has faced a backlash over her open-door migrant policy, and is up against a surging Alternative for Germany party (AfD), which also supports leaving the E.U. A defeat for Merkel could mean a referendum on E.U. membership, and strict border controls.

Although the AfD isn’t expected to unseat Merkel, German public sentiment could change based on the outcomes of the French and Dutch elections. Last week, Germany’s Economy Minister Sigmar Gabriel said the E.U. could disintegrate if populists win in France or the Netherlands.

“The French presidential elections this spring are bitter fateful elections for Europe,” Gabriel told the Bundestag lower house of parliament. “If enemies of Europe manage again in the Netherlands or in France to get results, then we face the threat that the largest civilization project of the 20th century, namely the European Union, could fall apart.” —Michael Katz

Related Link: The Post-Brexit Market

In 22 major markets, global institutional pension fund assets in defined contribution (DC) and defined benefit (DB) plans grew by 4.3% in 2016, and have grown by 3.8% per year over the past five years, according to a new study by the global advisory firm Willis Towers Watson. The assets grew to $36.4 trillion in 2016 and total pension assets amount to 62% of their countries’ GDP. China showed the highest growth rate at 20.3%, where the study covers the enterprise annuity market, and Japan, at –5.4%– was the lowest.

DC assets, growing at a rate of 5.6% over the past decade, continued to outstrip that of DB assets, which grew by 2.6%. DC assets now account for more than 48% of global pension assets, rising 7% since 2006, according to the study.

“Pension funds worldwide made some progress against their headwinds in 2016,” Steve Carlson, head of Investment, North America, at Willis Towers Watson, said in a statement. “This was largely because equity markets and alternative asset classes produced gains ahead of expectations. While funds in many countries have large pension outflows to deal with, it was encouraging to see overall asset values rise in the vast majority of countries covered in the study.”

The study noted an increase in allocations to alternative assets and a global trend with a decline in allocations to equities and bonds. The weight of domestic equities fell on average to 43% in 2016 from 69% in 1998. The US had the largest market in terms of pension assets, and the highest exposure to domestic equities, while Canada, Switzerland and the U.K. had the lowest, according to the study.

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The US, UK and Japan, respectively, are the three largest markets, accounting for more than 77% of total assets.

Of the 22 markets, the Netherlands grew its pension assets the most in proportion to GDP over 10 years. In the past decade, out of Australia, Canada, Japan, Netherlands, Switzerland, UK and US, the countries that increased allocations to bonds most were The Netherlands (44% to 54%), the UK (24% to 36%) and Japan (46% to 59%), according to the study.

The study also found currencies that experienced the largest depreciation against the USD in 2016 were the Great British Pound (-17.0%), the Mexican Peso (-16.4%), the Chinese Yuan (-6.6%), the Malaysian Ringgit (-4.2%) and the Euro (-3.6%).

Estimates at year-end 2016 were based on index movements, and before 2006, researchers focused only on ‘institutional pension fund assets’, primarily occupational pensions. After 2006, the analysis was widened to incorporate DC assets (IRAs) within US’s total pension assets. Due to unavailability of pension data in China, the study collected information on Enterprise Annuity assets only.