#Market Strategy — 16.03.2017

Not All Swans Are Black...

Philippe Gijsels

Dutch Elections: What Conclusions Can Be Drawn?

Last year, geopolitical events ushered in two sizeable black swans, namely the outcome of the Brexit referendum and the election of Donald Trump. The term 3black swan" is borrowed from the work by Nicolas Taleb used to designate unexpected events that in practice, are actually far more frequent than we think. After these two black swan events in 2016 therefore, it is not entirely illogical that the busy political agenda in 2017, especially in Europe, is causing widespread unease. Whatever the case, if there is one conclusion that can be drawn from the results of the Dutch elections, it is clearly that we should not imagine that all swans are black, just because we have seen two go past one after another.

Geert Wilders' PVV party admittedly gained a few more seats, but far fewer than expected. For the first time in a long time, this event could be one that spells the end to the hour of glory for populism. The two main parties in power, Mark Rutte's VVD and the PVDA, have had to retreat. The VVD is nevertheless the largest party with a good lead, but its coalition partner, the PVDA has suffered significant losses. Among the winners are the CDA, D66 and also Groen Links, which probably recovered some of the PVDA electorate.

The formation of a coalition can now start. Since the political landscape in the Netherlands remains highly fragmented, this is often a difficult and lengthy exercise. In the Second Chamber, 13 parties will share the 150 seats. However, the clear victory of the CDA and D66 parties as well as the continued presence of the VVD, means the creation of a majority of 76 seats could prove to be easier than initially feared.

Prior to the elections, polls suggested that five parties might be required to make up a viable majority (no-one seemed tempted by a minority government, and incidentally, this view-point has not changed). The block made up of VDD, D66 and CDA, that our Dutch neighbours would qualify as a traditional right-wing government, has already come along way (71 seats according to the latest count). This block could eventually be rounded out by a party such as the Christenunie or Groen Links in order to provide a majority (and also to obtain one in the First Chamber).

An alliance with the Christenunie should be possible but would only offer a very slim majority. The Groen Links option would enable a more comfortable majority, but the idealogical gap between the partners in the line-up could be difficult to bridge. Note that it will be very difficult (to avoid saying impossible), to create a left-wing government without the VVD. In other words, it is still early and in politics, nothing is ever certain, but the formation of a coalition already looks far easier than we feared it would be. This does not mean that the Netherlands will present us their new government the day after tomorrow!

An advantageous outcome for the markets

Whatever the case, the outcome of the Dutch elections is clearly positive for the markets. The vote seems to have put an end, at least temporarily, to the success of anti-European populism. If only because the participation rate of 82% was far higher than that of 2012 (74.6%), thereby overturning the idea that the population had lost its interest in and commitment to politics.

These factors could restore investor confidence in view of the other - even more crucial elections - on the cards in Europe. However, geopolitical tension was exactly one of the main reasons that prevented equity markets in Europe from following the massive upturn on US markets. This election result is therefore good news for the relative performance of European equities. It is also good news for the euro, but to a lesser extent since the interest differential between the US and Europe remains the dominant factor in this respect.

This does not mean that all caution should be abandoned in favour of euphoria. Further out, global economic prospects remain positive and better than they have been for a long time. And a world that can boast more growth, an extended US cycle and rising inflation, is, from an investor's viewpoint, a world in which equities clearly have more advantages to offer than bonds.

On the other hand however, equities markets are clearly overbought after the robust growth enjoyed since the start of the year, and in the end, since Donald Trump's victory. As such, rather than running after prices, we advise investors to make the most of downturns. At this stage of the cycle, it is also increasingly important to be selective and to pick the right sectors, the right stocks and the right instruments. And to be quick to seize the opportunities that arise.


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