Carousel of Political Discontent

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager & International Strategist

Hung parliaments in three recent elections may have investment implications. On this latest podcast, Stuart discusses what’s happening in Spain, Austria and Australia.

Quick hits:

  • Recent elections in Spain, Austria, and Australia highlight that voters are divided and unable to render a clear mandate for government.
  • Other parts of Europe appear vulnerable.
  • Politics pose risk to financial markets; loose monetary policy likely to persist in many places.

What do Spain, Austria, and Australia have in common? (No, this is not a trivia question nor the opening line of a bad joke.)

Each country in recent weeks has held elections, all of which failed to elect governments backed by a majority of the vote (with one case leading to yet another election).  Tepid economic growth has led to divided voters that could make it more difficult for governments to enact policies needed to stimulate economies. They each are riding “a carousel of political discontent”.

Starting in Spain

On June 26, Spain held general elections for the second time in six months (results of which were overshadowed by the Brexit referendum).  Both elections failed to confirm one party with a sufficient majority to form a government.  In fact, the two centrist-right and left parties lost parliamentary seats to smaller fringe parties. However, the June election did result in a higher seat count for the ruling center-right party.  Hope exists for the incumbent center-right party to be able to form a coalition, though most likely without support of a majority of parliament.[1]

Sobering developments in Austria

In May, Austria tried to elect a president, an office with more ceremonial functions than real political power.  The two final candidates came from the Greens and the far-right Freedom Party, parties not belonging to the traditional establishment.  After a very slight victory (50.3% to 49.7%)[2] for the Green candidate, the Austrian Constitutional Court annulled the results and rescheduled the election for October.[3]  Austria potentially might be the first country in the EU to elect a president from the far right, a sobering development in light of populist antipathy to the Euro project.

Instability in Australia

Elections that were intended to solidify the ruling coalition in Australia could end up having the opposite effect.  The ruling Liberal-National party coalition has lost seats in both houses of Parliament and faces the risk of forming a minority government.  Yet again, fringe parties siphoned off votes both from the incumbents and main opposition party Liberals. Australia has already suffered through five different Prime Ministers in the last six years. The last thing it needs is another unstable government and the risk of political paralysis and potential new elections.

Notable similarities

Three different countries with three different cultures still share some common themes. Slow economic growth has contributed to disillusionment with establishment parties. The new wrinkle is that cohesion in the traditional opposition, as well as incumbent parties, is unraveling. Fringe parties representing both ideological (far right and left) as well as parochial interests are gaining. Though unable to govern themselves, these fringe parties potentially could play greater roles as “kingmakers” for establishment parties to form ruling coalitions. More focus would be spent on holding together the coalition and catering to parochial issues rather than carrying through reforms to stoke confidence in the economy. Weak coalitions are prone to collapse and thus, new elections.

What’s the impact on other countries?

Other candidates for this cycle of discontent stand out in Europe, particularly countries in the Euro.  With its past history of rotating governments, Italy might reemerge as the popularity of incumbent PM Renzi has taken a hit from reform setbacks and lack of economic growth. The fringe opposition party Five Star enjoys significant popularity as shown in victories in recent municipal elections. The party espouses holding a referendum on Italy’s membership in the Euro. It might see opportunity to challenge Renzi in October when a referendum on voting reform is scheduled. If Renzi were to lose that vote, early elections are likely to ensue.

France also stands out with a vigorous populist far-right opposition party in the National Front of Marine LePen.  General elections in 2017 with the incumbent government suffering from depressed approval ratings could introduce additional market volatility. Along with a stagnant economy, France has also suffered backlash against efforts to reform labor markets.

What needs to change?

Political malcontent with economic growth has the potential to continue and add to market volatility. It also could lead to paralysis on fiscal and structural reform needed to accelerate growth. One consequence is likely: central banks will not be retreating from active monetary policy anytime soon in the face of weak growth, even if much of their dry powder has already been spent. Government inaction will still be replaced by central bank stimulation unless the situation changes.

Click here to listen to the podcast.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

[1] http://www.abc.es/espana/abci-rajoy-cita-manana-moncloa-201607051229_noticia.html  accessed on July 5, 2016.

[2] http://www.abc.net.au/news/2016-05-24/independent-van-der-bellen-wins-austrian-presidential-vote/7439372  accessed on July 5, 2016.

[3] https://www.theguardian.com/world/2016/jul/01/austrian-presidential-election-result-overturned-and-must-be-held-again-hofer-van-der-bellen accessed on July 5, 2016.

International Insights Podcast – Greece: How Bad Is It?

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

This audio podcast was recorded June 29, 2015:

Not surprisingly, Stuart’s podcast this week features the unnerving situation in Greece and the ripple effect it may have on a global scale.

Highlights of the discussion include:

In short…

  • The breakdown in negotiations between Greece and its creditors justifiably disappointed the markets.
  • Our sense is the end of the world has not come yet.
    • Primary links to Europe and world economy appear small and manageable.
    • Secondary links to Europe are murkier but not visible near term.
  • Watch economics and politics in peripheral Europe for further direction.

So, what about the near-term?

  • Do not underestimate Europe’s ability to prolong the agony (though it appears they are trying to force Greece’s hand even with the announced July 5 referendum).
  • Multiple scenarios could happen:
    • Best case is that Greece gets new government more willing to cut a deal
    • Worst case is Grexit and passive EU institutions

Does that mean it’s time to panic?

  • Primary links appear relatively minor and obvious
    • Most of Greece’s €340bn debt held by large government institutions (ECB, EU, IMF)
    • Direct trade links are small
    • Greek economy is small relative to Europe and the world
  • Secondary impacts less clear
    • Near-term hit to European confidence and economic growth
    • Medium-term credibility issue to the euro as a concept – in event of Grexit, should we worry about who is next?
      • Examples:
        • Italy – lower popular political support for euro (though ruling coalition supports Euro)
        • Spain – pending 4Q15 elections (one opposition party Podemos with minority of votes considers itself kindred to the ruling Greek Syriza party)
        • France – greater need for fiscal tightening, most popular anti-Euro populist party in LePen National Front

What to keep an eye on if things are getting worse or better

  • The euro
  • Peripheral bond spreads (Italy, Spain vs. Germany)
  • Greek referendum (Does it even happen? “Yes” a good result, but does it result in new negotiations and/or change of government?)
  • Popularity of other populist political parties in other parts of Europe (Spain, France, Italy)

Click here to listen to the full audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

Investment Insights Podcast – January 27, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 23, 2015):

What we like: ECB announces stimulative policies; developed markets (Spain, Italy, France, etc.) to benefit; hopeful for positive impact domestically

What we don’t like: U.S. economy slowing; investors nervous about current and future growth rate; some fallout from drop in oil prices

What we’re doing about it: Holding tight and looking for the benefits of the ECB stimulus and lower energy prices

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Is Europe on the Mend?

Magnotta@AmyLMagnotta, CFA, Brinker Capital

We have spent so much time focusing on the U.S. fiscal cliff that the concerns regarding Europe seemed to have been pushed to the sideline. On the positive side there has been progress in Europe. Mario Draghi, head of the European Central Bank, can take some credit for the progress. The Financial Times even named him their Person of the Year.

The €1 trillion Long-Term Refinancing Operation (LTRO) put in place in late 2011 helped fund the banking system. In July, Draghi pledged to “do whatever it takes to preserve the euro.” His words were followed up by the ECB’s open-ended sovereign bond buying program called Outright Money Transactions (OMTs) designed to keep yields on Eurozone sovereign bonds in check. The next step could be establishing the ECB as the direct supervisor of the region’s banks.

Source: FactSet

Source: FactSet

These actions have brought down borrowing costs for problem countries such as Italy and Spain, helping to change the trajectory of the crisis and prevent an economic collapse. Yields on 10-Year Italian and Spanish bonds have fallen over 200 basis points to 4.4% and 5.2%, respectively. The Euro has also strengthened versus the U.S. dollar since July, from a low of 1.21 $/€ to 1.32 $/€ today.

Source: FactSet

Source: FactSet

I wonder how long this lull in volatility in the region can continue in the face of a weak growth in the region. Seven Eurozone countries fell into recession in 2012 — Greece, Portugal, Italy, Spain, Cyprus, Slovenia and Finland. The Greek economy experienced its 17th consecutive quarter of contraction, while Portugal completed its second year of recession. There remains a stark difference in the economic performance of Germany and the rest of the Eurozone. Unemployment rates are at very high levels and continue to increase. Youth unemployment is above 50% in both Greece and Spain, a recipe for social unrest.

The ECB’s actions have bought time for the Eurozone economies to get their sovereign debt problems under control. However, continued austerity measures implemented in an attempt to repair the debt crisis have only served to further weaken growth in the region and exacerbate the situation by pushing debt to GDP ratios even higher. While some confidence has been restored to the markets, policymakers should attempt to implement more pro-growth measures to pull the region out of recession.

12.28.12_Magnotta_Europe_ChartCombo

Europe’s equity markets have rebounded nicely in 2012, leading global equity markets on a relative basis since the second quarter; the rally helped by the ECB’s actions. I remain concerned that the ECB’s measures, while improving confidence, do not address the underlying problems of weak to negative economic growth combined with deleveraging. Weak growth in the region should weigh on corporate earnings and keep a ceiling on equity valuations. The deleveraging process takes years to work through. Because the situation remains fragile, we are likely still prone to event risk and periods of increased volatility in the region.

Source: FactSet

Source: FactSet