Europe’s Falling Uncertainty: Dutch Edition

In 2016 the big political fears centered on Britain and America, with investors concerned Brexit and the odd US presidential election would roil markets. We all know how that turned out-stocks went up-but that hasn't stopped political fears from sprouting elsewhere. The focus now is Europe, and specifically the Netherlands, as Geert Wilders and his far-right, anti-euro Party for Freedom (PVV) are projected to do well in next week's parliamentary election. Some fear the Dutch vote is a bellwether for Europe's other upcoming elections and could give momentum to other anti-euro movements across the Continent (e.g., Marine Le Pen's Front National in April's French presidential contest). However, in our view, this overstates both Wilders's prospects as well as the general potential for Europe's populist movements. With many investors focused on potential negatives, uncertainty is presently high. But the results from the Netherlands should be a first step in falling uncertainty across Europe-an underappreciated bullish positive.

Wilders has grabbed headlines both at home and abroad for promoting radical stances-mostly sociological in nature, related to his nationalist bent. On a more market-related front, Wilders has long supported abandoning the euro and EU, a major plank of his campaign platform. Though Wilders is the third-longest-sitting member of the Dutch Parliament, his outsider status stems from breaking away from the mainstream conservative People's Party for Freedom and Democracy-known as the Liberals-to form his anti-establishment PVV. He wields total control of the PVV's platform and decision-making, as he is technically his party's only member. The rest of his parliamentary caucus is ideologically aligned but not card-carrying, hand-selected by Wilders.

For most of this year, PVV sat atop the polls, fueling fears Wilders would win and threaten the euro. Though recent polls show PVV falling behind, the race looks tight: Depending on the poll, the Liberals are neck-and-neck with the PVV or just slightly ahead. However, even if the PVV wins a plurality, Wilders seems likely to struggle to form a government and would be in no position to implement radical change, like exiting the euro (i.e., Nexit). The Dutch Parliament awards seats proportionally to the party's share of the vote, and currently, the PVV is projected to win about 25 of Parliament's 150 seats. Even the most extreme estimates put them at only about 35 seats. The PVV would need 76 seats to form a government, so Wilders would need to work with other parties to form a governing coalition. But no other political party has expressed a willingness to join a PVV-led coalition. Thus, even if PVV "wins," the most likely result is Wilders and his party acting as opposition to a coalition of centrist parties.

Many speculate markets are missing potential negative fallout from PVV success, but folks are mostly focused on the current state of uncertainty-not considering life after the vote. Once the election occurs, all those speculative hypotheticals and possibilities go away. With a final result, investors and businesses know exactly whom they're dealing with and can plan and adjust accordingly. Also, knowing who the primary actors will be means investors can recognize other political realities (e.g., gridlock), too. In the case of the Netherlands, though many folks focus on the potential ramifications of a PVV victory, fewer recognize the likely inability of Wilders and the PVV to govern and enact radical change. This disconnect between perception and reality sets up a bullish upside surprise, as relief gradually ensues.

The Dutch vote is the year's first major European election, and while it merits monitoring, the result is much more likely to foretell a broad trend of bullish falling uncertainty across the Continent than spreading euroland doom. France's presidential election in April and May, along with Germany's federal election in September, should add to this. Similar to the US presidential election and the Brexit referendum last year, falling European political uncertainty means investors can start appreciating other positives, like the economy's overlooked growth streak.