The Daily Update - The Netherlands and Europe

This week the Netherlands featured more prominently in the newswires as the country heads to the polls on 15 March for the parliamentary elections. Geert Wilders’ anti-establishment, anti-immigration, anti-euro far-right Freedom Party (PVV) has been leading in the January polls with the campaign slogan ‘Reclaim The Netherlands For Us’. Interestingly, three polls this week actually showed a decline in support for the PVV: Kantar Public/TNS TIPO showed a fall from 35 seats to 27 (out of 150 parliament seats), De Stemming showed a fall from 31 seats to 26 and I&O a decline from 26 to 20 seats.  The I&O poll also put the Liberal Party (VVD), led by the current Dutch Prime Minister Mark Rutte, in first place for the first time since November 2016 with 24 seats.

Despite PVV scoring well in the polls the market has only priced in a modest increase in risk; the Dutch 10 year has remained in a 10-20 bps spread range over bunds (since mid-2016) until last week when it has widened closer to 32 bps. But spreads traded at this level in 2015 and at that level it is comfortably within the five year spread range.

The most probable reason for this is that any government is likely to comprise a coalition of at least four parties. After all, voters have a choice of 31 parties with groups as diverse as 50PLUS, a pensioners’ rights party with the slogan ‘Because older people won’t put up with it any more’.  It currently has one seat in parliament but polls suggest this could rise to as many as 10 seats.  In reality The Freedom Party and Liberal Party are not that far apart given the problems electoral polls seem to be having in predicting accurate outcomes (consider the UK election in 2015, Brexit and the US election) particularly with one poll suggesting as many as 37 percent of potential voters are undecided in terms of who to vote for.

To get a governing majority a government would need 76 seats out of 150 and using the recent polls the PVV and VVD are projected to take 25-29 and 23-27 seats respectively meaning they would require coalition partners to form a government.  It is not clear at this stage even if the PVV ends up having the most seats whether they will be able to form a coalition government as many parties have ruled out working with Wilders given his extremist views; this includes the Liberal Party (VVD). The VVD’s current coalition partner, the Labour Party, or PvdA is projected to lose seats and could end up with as few as 11-13 seats so even if the VVD form the government the coalition is likely to require at least four parties.  Thus, in many ways the fragmented nature of the parliament is mitigating some of the political risk.

With all this political news flow the EC’s latest Winter 2017 economic forecasts received little attention.  Interestingly, the report forecasts ‘for the first time in almost a decade, the economies of all EU Member States are expected to grow throughout the entire forecasting period (2016, 2017 and 2018)’, although it flagged ‘higher-than-usual uncertainty’ with the balance of risks tilted to the downside. The Euro area is forecast to grow 1.6% in 2017, down from 1.7% in 2016, but accelerating to 1.8% in 2018. However, Europe still faces considerable challenges of an ageing population, high unemployment, weak investment and low productivity; the report notes the decline in Euro-area potential GDP growth from ‘close to 2% in the pre-crisis years to just ½% in the aftermath of the crisis’ recovering only to 1.1% in 2016.

Given the subdued growth and inflation outlook the ECB continues to adopt a patient and accommodative policy stance but with dollar rates on the rise this is creating an opportunity for some issuers to diversify their funding base: Pemex issued €4.25bn of euro denominated bonds this week which was more than 4x subscribed.  Although Europe has a number of creditor nations our models continue to struggle to find credits that screen attractively on our valuation models and that look better placed than a lot of the US dollar denominated issues we continue to favour.