It is rare we spend time worrying about the right things. Just because certain issues receive blanket coverage it does not mean they are necessarily where the biggest dangers lie. In fact, often these more mainstream, media-focused events can obscure the real threats.
There are two events on the horizon that are impossible to ignore. First there is the potential Brexit. Second, the US election, which might just lead to the populist, anti-establishment candidate Donald Trump changing the way America is governed.
According to the bookies, we will vote to remain part of the EU because the threat of the greater unknown will scare a sufficient number of undecideds to vote for the supposed stability of remaining a member of the European Union. This should be followed by Hilary Clinton becoming the first female American president in its history, as Trump’s provocative, if not downright offensive, rantings should have alienated a sufficiently large section of the US population to mean that the ‘anybody but Trump’ vote carries Mrs Clinton into office.
Both these events should cause short-term relief rallies. Markets do not like uncertainties and this will, for the time being at least, lay to rest the two that everybody is obsessing over.
However, when looking at the political risks to markets, I do not believe that either of these events are the ones we should be most concerned about, although a Brexit vote would probably serve to heighten the tension in all the up-and-coming European national elections.
It is these national elections that are the real existential threat to both the eurozone and the EU itself in its present state. This is why we are looking to move to a more defensive stance in both asset allocation and fund selection towards the end of the year.
The far right – in some cases the far left – and nationalist parties are gaining ground across Europe, and the majority are passionately anti-EU.
In the case of the French, who have elections in May next year, the bookies have the National Front’s Marine Le Pen at 6/1. She is the most popular politician in the country, but in the second and decisive vote for the position of president we think there will be an ‘anybody but Le Pen’ vote akin to the ‘anybody but Trump’ one.
The Dutch election has to be held by 17 March 2017, assuming the coalition hangs together that long. Unlike the French situation, Geert Wilders, leader of the Dutch Party for Freedom, could be in a position to manage a coalition, which would have to be staunchly anti-EU in nature.
Whatever its intentions were or are, the EU has become a deeply unpopular institution to an ever-increasing number of people. In my opinion, it is only a matter of time before an election is won, or control taken, by a party that will leave the EU.
The German election will be held by September 2017. With the new far right’s meteoric rise already reaching 15%, Angela Merkel is likely to struggle to pacify the opponents of her stance on issues ranging from Greece, to Turkey, to immigration.
In May, Norbert Hofer, leader of the Austrian Freedom Party, narrowly lost the country’s presidential election with his “putting Austria first” campaign, having clearly stated he will not support the Free Trade Agreement between the US and the EU.