European equities are on the march again. The MSCI Europe has risen 12.5 per cent in the past six month, outperforming both the UK and the US in local currency terms.
All this renewed vigour is in spite of the threats amassing around the next bend. European elections, we are repeatedly told, are this year’s version of Trump and Brexit. The polls may be mixed on the chances for Marine Le Pen’s National Front, but we have heard that before. To many observers, dismissing those odds would be complacent at best, naive at worst, in light of last year’s surprises.
But all in all those much-derided pollsters weren’t so wrong last year. In the UK, Leave was ahead in much of the pre-Brexit polling. Sampling may have been more inaccurate in the US, but the sizeable electoral college win for Hillary Clinton suggests a problem at the state level, not the national one. The main issue in both cases might have been a misreading of what the polls were telling us, rather than the polling itself.
So why am I confident in a Le Pen defeat? Because the data does not suggest the same story: a second round FN victory would represent a polling inaccuracy far in excess of anything seen so far.
What of the other major political events to come in 2017? Brexit negotiations are unlikely to have much meaningful negative effect on the bloc this year. In Germany, the biggest rival to Angela Merkel is the centre-left SPD. Its candidate is Martin Schulz: not a populist unknown, but the former head of the European Parliament.
This is not to suggest that unexpected outcomes have no chance of occurring, or that they won’t cause instability if they do occur. Rather, with so much attention now focused on these issues, it makes sense to be prudent and consider the contrarian case. Politics aside, the situation in Europe looks to me a little like that seen in the US in 2013.
The biggest risk may not be continued uncertainty, but quite the opposite: that the European Central Bank (ECB) decides growth, and inflation, look healthy enough for it to consider scaling back its quantitative easing programme. When then Federal Reserve chair Ben Bernanke announced similar plans in May 2013 it prompted the infamous ‘taper tantrum’. Noises about an ECB taper first surfaced around the end of 2016, and though it was quickly dismissed, the economic outlook has improved further since then.
The consequence of this may be little different to that which might emerge from a Le Pen victory: bond yields moving higher seems a decent bet. Like last year, investors worried about politics could once again be right for the wrong reasons.
Either way, it’s worth considering that the beginning of an end to easy money could be this year’s landmark event in euroland.
Dan Jones is editor of Investment Adviser and Money Management