March 2017

An investors guide to 2017 Eurozone elections

With a busy electoral calendar across Europe in 2017, many investors are watching closely to see whether populist candidates could gain power in upcoming elections across the region. We believe that markets have already priced in significant political risk. Moreover, the backdrop for these events is an improving economic picture. Although there is the potential for some short-term volatility, we remain overweight Eurozone equities.

Heading to the polls

Following the unexpected outcomes of elections and referendums across the world last year, all eyes are on this year’s busy electoral calendar in Europe. Although a far-right party fell short in the recent Dutch elections, a wave of anti-EU, anti-immigration sentiment has bolstered the popularity of populist and anti-establishment politicians across the region. The prospect of geopolitical uncertainty have market participants closely following this year’s elections.

Nonetheless, we are maintaining our tactical overweight to Eurozone equities. There is potential for disruption from these events, but we believe that markets have already priced in significant political risk. Meanwhile, Europe continues to show signs of economic improvement, as the chart below illustrates. Key elections include:

  1. France: In this year’s presidential and legislative elections, the far-right candidate has gained momentum on an anti-EU platform. While polls suggest that Marine Le Pen is unlikely to prevail (nor win a governing majority in the legislative election), the situation in France is fluid and we could still see significant changes in polling between now and the elections.
  2. Italy: The political outlook in Italy remains uncertain and the government may call for snap general elections later this year. Populist and right-wing parties together garner about 45% support in a country where anti-euro sentiment is strong and majorities in parliament fragile.
  3. Germany: the largest economy in the area also has elections later this year. However, the Populist Party remains too small to have any hopes of coming to power, although it is likely to get a boost in Parliament. The two most likely scenarios: continuity with Angela Merkel as chancellor in a left-right coalition, or a more left-wing coalition led by Martin Schultz, who is much more favorable to further European integration.

Investors cautious on Europe, despite
improving economic backdrop

Investors cautious on Europe, despite improving economic backdrop

Source: BlackRock Investment Institute, Thomson Reuters and EPFR, February 2017. Flows represent monthly cumulative net flows in to Europe ex-UK equity funds from January 2012 to 8th February 2017.


What to watch

Date Country Event
March end UK Self-imposed deadline for formally notifying the intention to withdraw from the EU.
April 23 France French presidential election, first round
May 7 France French presidential election, run-off
June 11 France National Assembly elections, first round
June 18 France National Assembly elections, second round
September 24 Germany German federal election
Date not confirmed Italy Possible early elections in the second half of the year

Conclusion

Although not trivial and a likely source of volatility, political risk in Europe seems to be already discounted in markets and is keeping investors at bay. Therefore, we are tactically overweight Eurozone equities as we believe that a combination of stronger growth, earnings momentum, attractive valuations and light investor positioning, can provide eventual upside to the stock market.


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Authors
Investment Strategist for ETF Investment Strategy