SPDR ETFs: Assessing the implications of the Dutch General Election vote

Mar 13th, 2017 | By | Category: ETF and Index News

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MB – Marvel Baartman, Senior Economist, Clingendael, Netherlands Institute of International Relations
AL – Antoine Lesne, Head of SPDR ETF Strategy & Research, EMEA

Netherlands Flag Dutch General Election

The Dutch general election is due to be held on Wednesday 15 March 2017.

Given the surprising voting results of the past year, elections and referenda now garner more attention than ever before — especially where there is a whiff of populism that could lead to another result in the style of Brexit or Trump. Against this backdrop, Marcel Baartman, a Senior Economist Clingendael, the Netherlands Institute for International Relations, sat down with Antoine Lesné, Head of SPDR ETF Strategy & Research, to assess the potential impact of the upcoming Dutch General Election vote.

  • Which candidates are likely to garner the highest scores in the general election vote?

MB: Both Geert Wilders from the PVV and Mark Rutte, the current Prime Minister, from the VVD are the most likely candidates to earn the highest scores in the coming general election. Who will ultimately be the largest party is unclear at this moment, as they are very close in the polls. It is important who will have the highest score as the winner will be asked by the King to investigate the possibilities to form a government with a majority in parliament. However, many political parties have explicitly refused to form a government with the PVV. So, even if Geert Wilders gets the highest score, he will not be able to form a government. His party, the PVV, will probably win around 25 seats in parliament — and you need 76 seats to govern.

So the PVV needs other parties to have a majority in parliament and most parties don’t want to cooperate with him. This means that Mark Rutte will then be asked by the King. He has a better chance to form a government successfully, but it will not be easy given that many parties are expected to end up with roughly 15 to 18 seats. This means that you need a coalition of 4 to 5 parties to have a majority in parliament. Long and tough negotiations are to be expected between these 4 or 5 needed parties to come to an agreed government programme. So, it could be that the formation of a new government might take up to a year. In the meantime, the current government of VVD and PvdA will ‘look after the shop’; in other words, they will ensure that the country has a government but they will not initiate new policies.

  • Considering each of the main candidates, which might markets welcome most positively?

MB: In the Netherlands, most parties are in favour of the European Union (EU) and the euro. There are two clear exceptions on these issues. First there is the PVV, which wants to get out of the EU and get the guilder back for the euro. The other exception is the SP, or Socialist Party, which wants to stay in the EU but get rid of the euro. The mainstream parties have quite a uniform view on the EU and the euro as they are all critical but in favour. So the probable new government with the VVD and many smaller parties will be positive for the European project and the euro. Most Dutch parties do understand that for a small and open economy, as the Dutch economy is, Europe and the euro are important contributors to our wealth. This openness of the economy and vulnerability to external developments make most parties pro-business.

  • Could there be a positive or adverse effect on certain industries or asset classes under different coalitions?

AL: It is quite difficult to determine upfront the effects of a coalition on industries or assets. That has to do with the formation process for a Dutch government. This will be very much the outcome of all kinds of compromises that will have to be made by the various participating parties. That process is quite non-transparent and unclear and will be determined by the various swaps on issues between the parties.

That said, the financial sector is quite unpopular among most political parties, as they see the banks and other financial institutions as the main drivers of the financial crisis in 2008. The Dutch State had to bail out banks for significant amounts of money. The consequence could be that the new coalition will remain critical of the financial sector.

  • And on the geopolitical front, what possible ramifications could this election have, particularly with regards to Dutch membership in the EU and the Eurozone? Is it reasonable to give credence to a potential exit by NL?

MB: A potential exit of the Netherlands out of the EU is not at stake. An exit will not happen after these elections. The first reason is that the PVV and SP are not expected to be part of the next government. Second, the Dutch Advisory Referendum Act makes it very difficult to make EU membership the subject of a referendum. So the referendum cannot be used to have the Netherlands exit the EU. And mind you, referenda in the Netherlands are always advisory, meaning that the government can ignore the results of a referendum.

However, if Geert Wilders with his PVV become the largest party it will give a clear signal to the rest of Europe. It might improve the chances for Marie le Pen in France as the populist movement with Brexit, Trump and then Wilders gathered more momentum.

AL: Such an outcome would likely weaken the Euro versus the US dollar momentarily. Meanwhile, spreads of French government bonds, as well as those of peripheral countries like Italy, may widen versus Germany. If the vote on Brexit has cast a shadow on the European project, this situation could be pushing Europe onto a darker path. While unlikely at this stage, this would also question the very existence of the euro as a single currency and, consequently, would weaken it further. Ironically, this may help lift exports but also ignite inflation further. But the feel-good moment wouldn’t last and stagflation and a proper debt crisis could be the likely outcome.

While not the base case scenario, investors would potentially need to look for exposures that may be more domestically focused and with a higher quality tilt. Low volatility strategies may do better. US Treasuries could be a momentary haven, even if the risk of a US Federal Reserve rate hike could negatively impact performance. Equally, we have seen the markets digest these events very rapidly in 2016, so a cautious bias may be defeated this time again. Going neutral ahead of the event and getting ready to deploy cash as the outcome of the elections is digested may eventually be more appropriate.

  • Why are Dutch voters so sensitive to populist theories when the situation does not look so bad when seen from abroad (for example GDP, unemployment, etc.)? Is it the older voters or younger voters who express this discontent?

MB: It is true that many indicators for the Dutch economy look good: 2017 GDP growth is expected to be 2.1%; unemployment is down to 5.3%; the current account has a surplus of 8.7% of GDP; and the budget deficit of the Dutch government is 0% of GDP while the government debt ratio is 59.7% of GDP. However, there is a growing part of the population that is vulnerable and they have to deal with lower pensions, weaker health care and a deteriorating social security system. But in addition to these economic reasons, substantial parts of the Dutch population are worried about the high number of immigrants, terrorist threats and loss of the Dutch cultural identity due to globalisation and multi-cultural society. These latter reasons count stronger than the economic rationale and, therefore, the discontent is expressed by all kinds of voters.

This phenomenon highlights the tug of war in which markets have to find their way: the economy is doing well and is eventually helping to foster better earnings. Globalisation is back with China exporting inflation at last. Glass half empty, or half full? Wanting for the better? Looking under the hood and finding glimpses of hope is required. Discipline around allocations remains key to keeping a cool head as vox populi has an impact on exposures. It’s a long race with numerous obstacles, but the direction seems to be up as inflation and economic data alike continue to surprise on the upside. The nonfarm payroll data may be more watched than the Dutch elections for their impact on markets.

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