European election mode is well under way. Roaming around Malta, the number of billboards and banners filling up the streets cannot go unnoticed, as the islands together with the other 27 European states set the stage for what might be a game changer for mainstream parties. More than 350 million EU citizens will head to the polls between May 23 and 26 to elect a new Parliament – a vote that will shape the future of the bloc, amid the strong resistance against the ongoing immigration issues and years of austerity.

All eyes are on the European elections, as for the first time in 40 years mainstream parties are expected to end their years of dominance in the European Union. Polls are showing that two major parties, being the conservatives and the socialists, are set to lose their combined majority. If this scenario becomes reality, it will be more difficult for policymakers to pass on legislative laws in the European parliament - which were previously mutually agreed upon by both parties.

Despite this, both parties are still set to have the largest representation in parliament. This will thereby imply that new agreements will need to be formed with other smaller parties - which will be a real challenge and may pose higher risks to the European Union, going forward. The far right euro sceptics, Europe of Nations and Freedom (ENF), are set to register considerable gains from the lessened representation of the major parties. Germany’s Alternative für Deutschland, Italy’s Lega Nord and France’s National Rally (National Front) form part of the ENF and are witnessing increasing popularity. Despite this, the migration issue is not dominating the polls in the way far-right euro sceptics had hoped for.

Due to this, it may take more time than usual to find the right balance between parties and to form the European Commission (EC). Therefore, it is expected to be fully functional not earlier than 2020. This may result in short-term market volatility, due to an increase in uncertainty, which leads to a weaker Euro coupled with an increase in sovereign spreads. Notwithstanding the uncertainty and investors’ uneasiness which elections usually bring about, European equity markets have so far performed extremely well as investors jumped on risky assets.

European equity markets have so far performed extremely well as investors jumped on risky assets

On the other hand, the sovereign debt market is sending different signals, as the yield on the 10-year Germany bund sunk to its lowest levels since mid-2016. Bund yields have been under pressure since the start of the year, with some investors seeking out on safe haven assets, despite the rally in risky assets at the same time. The 10-year bund started off this year trading at 0.25 per cent and is now trading at a negative yield of 10 basis points. Conversely, Italy’s 10-year yield has risen to 2.75 per cent.

The unhappiness of citizens in major countries within the European Union is apparent, with findings from the European Council on Foreign Relations (ECFR) survey showing that France led by Emanuel Macron, believe that both the national political system and the EU system are broken down. This is also seen in more stable and conservative member states such as Sweden and Germany, where major political parties, as elsewhere, are facing enormous pressure.

A recent survey conducted by the ECFR together with You Gov, having a sample size of 46,000 voters in 14 member states (not including the UK), confirms the distrust Europe is facing in reaching its highest levels of electoral volatility. This survey also confirms that the vast majority of the electorate (70 per cent) could move either way. Furthermore, the five-yearly turnout has been falling steadily since 1979, with 2014’s being that of 43 per cent. Despite this, according to last year’s Eurobarometer survey, roughly two-thirds of Europeans believe their country has benefited from EU membership - the highest percentage since 1983.

As we have seen in recent years, surprises within the political sphere have occurred and will continue to occur. Europe is no exclusion towards these surprises, with Italy’s Five Star Movement led by comedian Beppe Grillo alongside the far right Lega Nord led by Matteo Salvini. Similarly, Greece and Spain, together with other European countries, have seen similar upheavals. Such events will continue to persist this year, having a number of regional and presidential elections.

European yields across different countries may continue to diverge, as investors shy away from the riskiest governments. In addition, with more market uncertainty, equity prices are usually more volatile. This should not induce investors with diversified portfolios to jump ship. In fact, as we wrote in various articles over the past months, investors should take advantage of any short-term market fear and make it work in their favour to generate long-term returns. Us, as investors, will remain mindful of the importance political risk plays in the day-to-day movements in financial markets and our investors’ portfolios, and hence we will continue to stress the importance of diversification beyond different direct issuers.

This article was prepared by Julian Mangion, Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on 2122 4410 or e-mail julian.mangion@jesmondmizzi.com

http://www.jesmondmizzi.com

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