April 21, 2017—

Wilmington Trust has been monitoring several political developments in Europe, particularly the upcoming French Presidential elections, the UK general election and the recent Turkish referendum rendering greater powers to its president. Here we will provide our assessment of these developments.

A tightening first round in the French presidential race

  • The first round, on Sunday, April 23, is an elimination round.    
  • It still looks most likely that Emmanuel Macron and Marine Le Pen will survive the first round. Macron is a center-left establishment candidate who favors France remaining in the EU and eurozone. Le Pen is right-wing and anti-immigration, she favors a referendum to take France out of the Eurozone and EU.
  • Center-right Francois Fillon appears to be recovering from his scandal regarding providing jobs to relatives.
  • Extreme-left Jean-Luc Mélenchon is also gaining some late strength.
  • First-round victories by Macron and Le Pen on April 23 are already priced into markets and we don’t expect any significant reaction the following day.
  • On the other hand, if Fillon rather than Le Pen survives the first round, we would expect a positive market reaction on Monday, due to the fact that both wish to stay in the Eurozone and EU.
  • Should Mélenchon and Le Pen survive the first round, we believe it would produce a negative market reaction. Mélenchon’s leftist policies are viewed as anti-market and he is not perceived as a strong alternative to Le Pen.
  • In the second round, scheduled for May 8, Macron and Fillon are likely to trounce Le Pen by a large margin—around 60% to 40% or thereabouts. Le Pen is only likely to win the second round if Mélenchon is her opponent, but he’s not likely to displace Macron or Fillon in the first round.
  • Of course, a surprise Le Pen victory on May 8 we expect would be extremely market-unfriendly.

Prime Minister May’s calling of snap general elections

  • Prime Minister Theresa May has effectively thrown a one-two political punch—first, a left jab on March 29, when she triggered Article 50 of the European Union’s (EU) Lisbon Treaty, which kicked off the two-year period of proceedings around the U.K.–EU “divorce”; and then a right cross on April 19, when she called for an early general election to be held on June 8.
  • The elections are intended to reinforce her Conservative Party’s dominant position in Parliament before her mandate erodes during the upcoming Brexit negotiations and while the opposition Labor and Lib-Dems remain still extraordinarily weak.
  • The elections are also intended to signal to the EU that she has a powerful popular negotiating mandate for the upcoming Brexit talks.
  • We expect that the Conservatives will maintain control of Parliament by a very large margin.
  • The election may also help to unify the Conservative Party, which has been split between pro-establishment, London-resident, pro-Remain party leaders and back-benchers from outside London who are generally pro-Leave.     
  • Scotland is a wild-card. If the Scottish Nationalist Party wins big over the Conservatives and Labor, that would provide support for a Scottish secession referendum, all the more so after Scotland’s population voted overwhelmingly to remain in the EU.

On the referendum expanding President Erdogan’s powers and tenure in Turkey

  • On April 16, Turkey held a referendum which granted additional power to the presidency, which is currently held by Recep Erdogan.
  • It is important to understand that even before Erdogan became prime minister and (from 2014) president, Turkey was never a full democracy. While there were democratic trappings, real power was always exercised by the military and intelligence services. Occasionally, they would overthrow civilian-elected governments, but always they would exercise behind-the-scenes influence.
  • Erdogan’s Turkish referendum is not an “event” but rather part of a process whereby Erdogan has gradually been expanding his power and influence at the expense of the military and intelligence services.  He has been wary of the senior army brass and other politicians who might be allied with them, including a former Erdogan ally now in Pennsylvania. Erdogan built up the gendarmerie police forces, under his personal command, as a counterweight to the military and has fired many army leaders. The failed coup attempt last year, where Erdogan’s gendarme prevailed over the army, was a pretext for Erdogan to fire very large numbers of military and government officials.
  • While President Erdogan is personally religious, he is not per se a religious figure, and he is not an Islamist. In our opinion, he is not going to turn Turkey into Iran. Still, he has been considered a threat by those in Turkey who are very secular—those who would, for example, wholly ban head coverings or prevent students from attending religious schools.
  • Recently stated opinions, state that the expansion of the presidency, the reinstitution of the death penalty, or other similar actions, would prevent Turkey from eventually joining the EU. However, no one in Brussels or Ankara has believed in many years that Turkey would be admitted. For one thing, Turkey has a much larger and poorer population than Germany, so Turkey’s admission would change the nature of the EU.  

Core narrative

Our expectations are for the strong European stock performance exhibited in late 2016 and early 2017 to persist for the remainder of this year into next. We believe political and other risks have been receding in Europe, where it appears more likely that centrist candidates will prevail in upcoming elections; also, business and consumer sentiment levels have reached their highest points in six years. This is all consistent with our recent portfolio adjustments, slightly reducing our U.S. domestic large-cap allocation and adding to our developed international equity allocation.

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