By REX Shares, LLC :
Last year proved how difficult elections were to forecast, and elections in 2017 may prove no easier. Britain's vote to exit the EU in June 2016 and Donald Trump's election in November 2016 may both be behind us, but populist movements in Europe continue to gain momentum and call for drastic political change this year. Farther from home, Iran's current president may face a tough reelection as he awaits formal action from the Trump White House. And in Asia, Hong Kong's Chief Executive election takes place as relations with China look set to deteriorate further. Uncertainty may be the only certainty that lies ahead.
Will polling and predictions in 2017 be as unreliable as they were for Brexit and Trump in 2016? The market's immediate reactions to both of those surprises were a stock market selloff and a rally in gold and the VIX index. While ultimately the stock market recovered from both these events in 2016, sustained political uncertainty in 2017 may precipitate quite a different outcome. It may therefore make sense to consider an allocation to less correlated assets like gold and volatility.
In order of their occurrence, here are the top 5 political uncertainties we see ahead of us in 2017:
- March 15th: Netherlands Prime Minister Election:
Historically, one of the more liberal countries in the EU, the race in Holland for the Dutch parliament is leaning towards a far right political party - the Party for Freedom (PVV), led by Geert Wilders . Mr. Wilders' policy proposals include a pledge to leave the European Union and ban all Islamic symbols, mosques, and the Koran. While the size of the Dutch economy may limit the immediate global economic impact, if a "Nexit" were to unfold, Wilders anti-refugee and protectionist sentiment would help set the stage for EU elections in 2017.
- March 26th: Hong Kong's Chief Executive Election:
Here the race is less about right and left or a shift towards populism, but rather about the deteriorating relationship between the Hong Kong people and the Chinese administration. The backdrop to this race began unfolding with the Umbrella Movement in 2014 . Last November, Chinese President Xi reiterated China's policy of one country two systems , and quashed any ideas of political independence for Hong Kong. A recent report from Amnesty International finds Hong Kong's human rights have deteriorated to their worst level since China took back control of the region in 1997.
- April 23rd and May 7th: France's First and Second Round Presidential Election:
In December, President François Hollande announced he would not run for reelection in 2017, further energizing the anti-establishment movement in Europe. The French presidential candidate with the most buzz is far-right candidate and Nationalist Front party leader Marine Le Pen , who would like to leave NATO, and who has suggested that Portugal, Italy, Spain, Ireland, Greece and Cyprus should all join France in leaving the European Union. Polls currently have her ahead in the first round of voting, putting her in a close race for President. Even if she lost, her party's growing appeal is probably shifting French politics further to the right. The Nationalist Front party has the most support among French people aged 18-34.
- May 19th: Iran Presidential Election:
Hassan Rouhani won in a landslide presidential election in 2013 to succeed the hard line President Mahmoud Ahmadinejad on a moderate platform with promises to work with Western powers. However, a hardline candidate may again see an opening as the Iranian economy plods along - the Iranian Rial traded at all-time lows against the U.S. Dollar in December , Trump's tough campaign trail talk on renegotiating the nuclear deal also looms, and Rouhani recently clashed publicly with the country's conservative judiciary as tensions rise ahead of this year's election.
- October 22nd: German Chancellor Election:
Angela Merkel is running for a fourth term and is currently expected to win, but the nationalist Alternative for Germany party (AfD) is growing in popularity. Following the horrific Christmas truck attack in Berlin the AfD jumped to 15.5 percent of the vote while Mrs. Merkel's Christian Democrats dropped to 31.5 percent . This follows AfD's outperforming of Merkel's party in her home state elections in September as they campaign against open door policies which allowed one million war refugees and migrants from the Middle East, Africa and Asia to settle in Germany over the past year. If Germany experienced further terrorist attacks, the anti-EU, anti-immigration party may continue to gain in the polls and possibly threaten Merkel's re-election bid.
It's perhaps more important than ever to take stock of upcoming political events. Added to these 'Top 5', other political risks include what the Trump administration might precipitate in Russia, China, North Korea, and Syria. Eurasia Group has called 2017 the "most volatile" year for political risk since World War II.
During uncertain times, an investor may consider a tactical allocation to gold and volatility. Empirical research shows that gold can exhibit both 'hedging' and 'safe haven' properties, 1 and volatility products can be uncorrelated with the stock market.
- Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), 217-229.
REX Shares, LLC ("REX") creates intelligently engineered alternatives ETFs that seek to help investors navigate turbulent markets and preserve wealth. REX was founded with a focus on gold and volatility based investment strategies. REX is based in Westport, CT.
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See also Politics Is About To Have You And Your Portfolio 'Seeing Red' on seekingalpha.com