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11 August 2016

Beginning in October, a succession of significant referendums and elections across Europe mean political risk will remain to the fore.

By a quirk of rescheduling, the second of October 2016 has the potential to be a historic day for both Austria and Hungary, 98 years after the formal end of the Austro-Hungarian Empire. Yet these are just the first two in a series of votes that promise to keep politics at the forefront of European investors’ minds.

In July, the Austrian high court annulled the result of the May presidential election due to counting irregularities. In the original vote, a Green Party candidate had beaten Norbert Hofer by just 50.3% to 49.7%1.  Hofer, the leader of the hard-right Freedom Party of Austria, has now been handed another chance scheduled for 2 October. Hofer is a eurosceptic who has promised a referendum on Austrian membership of the EU, should there be moves towards greater EU integration – or if Turkey joins the union.

Hungary is, in many ways, further down the road towards rejecting EU suzerainty on migration issues than Austria. On 2 October, it will hold a referendum on the question: Do you want to allow the EU to mandate the resettlement of non-Hungarian citizens to Hungary without the approval of the National Assembly? Viktor Orbán’s government will be campaigning for a ‘no’ vote and the (admittedly limited) polling shows his campaign as on course to win between 64% and 82% of the vote – despite the fine Hungary will face for refusing to accept its next allocation of refugees.2

If Hungary rejects the EU’s immigrant quota as expected, the only immediate consequence will be that Hungary pays its non-compliance fines. In Austria, meanwhile, a Hofer win could translate into tetchier relations with the EU. Yet such results pale beside the UK’s Brexit vote, which itself appears to have led to a fall in Euroscepticism elsewhere in the EU. A Gallup poll in Austria, Voxmeter poll in Denmark, and Iltalehti poll in Finland, for example each showed a July increase in popular support for continued EU membership.3

Italian bank job

No later than October, Italy will also hold a referendum, but on an even more fundamental issue: its constitution. The 57-word referendum question asks, in essence, whether greater power should be concentrated in the hands of Italy’s lower house and its government. Rescuing troubled banks will be aided by an end to the parliamentary gridlock that results from Italy’s current constitutional arrangements and Matteo Renzi, the prime minister, has promised to resign if he loses. Italy, unlike other countries, has not recovered a healthy rate of economic growth since the financial crisis.

“Italy’s weakness post-2007 was as sharp as in Spain and the United Kingdom, but the economy hasn’t recovered as those economies have done,” says Stuart Mitchell of S. W. Mitchell Capital. “A number of people believe this is because there hasn’t been the political reform and economic reform in order to allow their economy to flourish again. One of Renzi’s keystones when he became prime minister in February 2014 was constitutional reforms. What matters is the process of non-performing loans being realised and banks being able to sell of the underlying assets to get back their loans. For that to happen quickly, Italy’s political process needs to be much more efficient, so it’s a very important referendum.”

Nevertheless, Mitchell believes the wider political commitment to the EU will provide a tailwind.

“The absolute fact is that Germany and Angela Merkel want this European project to work and she will do anything she can to keep Europe together and for Europe to thrive and progress,” he says.

Ballot bonanza

Major political events continue in the New Year: Dutch general and French presidential elections in the spring, and a German Bundestag election no later than the autumn. In all three cases, hard-right Eurosceptic parties pose a significant threat to the political status quo, and are likely to focus much of their campaigning on immigration and the EU.

Yet the emergence of a government committed to leaving the EU is not considered likely in any of these cases. In fact, the greatest risk posed by the votes may instead be the delay that they place on addressing other problems within the EU and eurozone. Among those issues is the UK exit, and Theresa May’s indications thus far mean the UK could choose to trigger Article 50 of the Lisbon Treaty in 2017, formally starting the timer on two years of exit negotiations.

The UK’s vote to leave the EU – the most significant European political event of recent years – immediately pushed the pound to a 31-year low4 and has been followed by a series of indicators that point to a possible UK recession. But stocks have performed well – the FTSE 100 is above and FTSE 250 only slightly below pre-referendum levels.5 Crucially, fallout within the EU has thus far been limited to shaved growth forecasts, and eurozone indicators have remained buoyant.6

Moreover, investors who sold off their UK-listed holdings in the short-lived market dip that followed the referendum result simply succeeded in crystallising their losses – and missing out on the subsequent recovery. None of the scheduled political events in Europe in the coming 14 months look likely to match the magnitude of the UK’s Brexit vote.

European politics may spark further short-term market dips in the months ahead, but the best companies will continue to grow and innovate, even in the stormier bouts of political weather.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The information contained above, does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

Stuart Mitchell of S. W. Mitchell Capital is the manager of the St. James’s Place Continental European fund and co-manager of the St. James’s Place Greater European Progressive fund.

Source: Bundesministerium für Inneres, Austria
Sources: ZRI, Publicus, Nézoponte, Szazadveg
Sources: Gallup, Voxmeter, Iltalehti
Source: http://www.reuters.com/article/us-global-forex-idUSKCN0ZC17J
Source: Google Finance
Sources: https://www.imf.org/en/News/Articles/2016/07/18/18/11/NA07192016-IMF-Cuts-Global-Growth-Forecasts-on-Brexit-Warns-of-Risks-to-Outlook; Markit Purchasing

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