Far right supporters attend a presidential campaign rally by National Front Leader Marine Le Pen at the Dome De Marseille on April 19, 2017 in Marseille, France.Jeff J Mitchell/Getty Images
Shame on us, the press, for not figuring out weeks or months ago that British Prime Minister Theresa May would call a snap election this year. Why wouldn't she be opportunistic?
The Labour Party, under the hapless Jeremy Corbyn, is sinking fast. Recent polls put Labour some 20 percentage points below the Conservatives. Ms. May might not win the June election by a landslide, but she almost certainly will add some bulk to her skinny parliamentary majority (the Conservatives have 330 seats out of 650).
A bigger majority would, in theory, give her a stronger hand in negotiating Britain's way out of the European Union, assuming, of course, that her internal opponents – the soft Brexiteers or the anti-Brexiteers – are silenced by Ms. May's potentially commanding victory.
For investors, however, the ramifications of the British election are not clear. On Tuesday, when Ms. May dropped her election bombshell, the pound soared and the shares of the FTSE-100 companies dropped. The currency rose, it appears, because investors like the idea of a strong Conservative government – read: pro-business – and a weakened Labour opposition.
Share prices dropped because the big British companies haul in a lot of their profits outside of Britain; the weaker the pound, the stronger the sales and the profits (the FTSE dropped again on Wednesday and the pound gave back some of its gains).
Over the longer term, there are simply too many unknowns to judge the investor impact of the election on the stock market or Brexit, the negotiations of which have yet to start and are unlikely to begin in earnest until September's German election is finished.
My own guess is that, assuming Ms. May's majority pops up by a few dozen seats, the action, at least in Britain, will be more off the stock market than on it. Ms. May might just listen to her constituents and crack down on a business model that has, in effect, made London a tax haven for banks and oligarchs. She might impose a tax on the absentee landlords who buy entire buildings of condos and leave them empty, reducing the housing supply for everyone else and increasing property prices. If she were to tilt the tax advantages away from the rich and whack absentee landlords, she could probably win the next three elections.
Equity and debt investors would be much better served by ignoring Britain's election and focusing on the potential political upheaval in Europe. What will happen in the French, German and Italian elections over the next year will make the British election look like a sideshow unless a political miracle happens and Labour, Lazarus-like, rises from the dead and taxes everyone to death.
Start with France. Sunday sees the first round of the presidential elections, and the outcome is too close to call, with the top four candidates all polling at about 20 per cent, give or take a point or two. Two of the candidates, François Fillon and Emmanuel Macron, are in favour of keeping the EU and the euro intact. Mr. Macron, the centrist candidate, has said the EU needs more integration, not less.
The two other leaders, Marine Le Pen of the National Front and the Communist-backed far-left candidate, Jean-Luc Mélenchon, are on the opposite side of the debate. Ms. Le Pen wants to yank France out of both the EU and the euro and put hard borders back up, all the better to keep immigrants away. Mr. Mélenchon is less extreme, but has said he would end France's relationship with the EU unless its treaties were rewritten in the country's favour.
While the polls say it's unlikely that either Ms. Le Pen or Mr. Mélenchon would win the election, the scenario is not out of the question. If one of them were to become president, the EU would be turned upside-down. The EU might be able to survive Brexit; it could not survive a Frexit on top of it. The euro would likely collapse, and the sound made by the flight of capital out of the EU would be deafening.
Even if Ms. Le Pen and Mr. Mélenchon concede defeat, they could attract a lot of votes, reminding the pro-EU technocrats and politicians that the populist movement is more alive than dead. Meanwhile, populism and Euroskeptcism is thriving in Italy, the euro zone's third-largest economy. The Five Star Movement is leading the polls and could well win the election, which must be held by this time next year. Beppe Grillo, the comedian who leads Five Star and turned it into Europe's biggest elected populist party, has vowed to hold a referendum on the euro.
The rise of populism in continental Europe and the efforts of the anti-populist politicians and governments to contain it, not the British election, will emerge as the greatest investment theme of the year. If the populists gain momentum to the point that they emerge triumphant in a big economy like France or Italy, all bets are off for your European portfolio. Brexit will matter in a couple of years. Right now, it and the June election in Britain are non-events compared to what's happening in the EU.
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