LONDON (Reuters) - The chances of an anti-establishment candidate winning in Europe next year are high following Brexit and the U.S. election of Donald Trump, and if it led to France leaving the European Union it would be financial “catastrophe”, Columbia Threadneedle Investments said on Thursday.
Mark Burgess, chief investment officer for the firm in EMEA, said that unlike the positive or even ambiguous market reaction to the British vote on an EU exit or Donald Trump’s win last week, a win for avowedly anti-euro, anti-EU party in one of the many euro zone elections next year could spell disaster for the still-undercapitalized European banks.
“Were you to get an ”out“ party elected in a euro zone constituency, that would place significant stress on the financial system... that would be quite bad news for many European banks,” he told the Reuters Global Investment Outlook Summit.
He said a Dutch exit would be a real challenge for the banks but added: “France would be a catastrophe.”
Europe faces a potentially turbulent electoral calendar, beginning on Dec. 4 with a referendum in Italy, on which Prime Minister Matteo Renzi has variously staked his career, and an Austrian presidential election run-off.
The Dutch go to the polls in March, France votes in a presidential poll in April and May and Germany faces a general election later in 2017.
France’s far-right National Front party leader, Marine Le Pen, has vowed to hold a referendum on whether France stays in or leaves the EU if she wins the 2017 presidential. She is expected to make it at least into the final round.
Asked if he expected an anti-establishment party to win one of the upcoming European elections, Burgess said, “That has to be one central case and I struggle to see how you wouldn’t get that. There are too many goes at it.”
Burgess, whose company managed 361 billion pounds ($449 billion) of assets at the end of September, said Trump’s election, with the prospect of tax cuts and infrastructure spending boosting growth and inflation could end an era when investors had been forced by low bond yields to seek yields in other assets.
“The big call, and it’s one we are yet to work through, is what one does to financials and to the banks. If the yield curve is about to (steepen), all of a sudden it becomes a better environment to be a bank.”
Burgess said his top trade for 2017 was Japanese stocks, which would be helped by a fall in the yen.
“I would buy a play on a rally in the Japanese stock market...I think the yen is going to have a big move against the dollar, which is good for Japan Inc,” he said.
Burgess cautioned that a rapid rise in the dollar, which has been given fresh impetus by Trump’s victory, could be bad for riskier assets.
“If the dollar gently goes up, I think we’ll be OK, but an aggressively rising dollar will be bad news for emerging markets, quite painful for China and it could undermine risk assets. The speed of the rally will be a critically important thing to focus on.”
Europe was his least favorite equity market and that a rally in European banks had probably run its course and that greater clarity on their capital position was required.
In bond markets, Burgess said his portfolios were still short the UK and Europe but added, “If we are going to have a dollar bull market, Treasuries will look relatively interesting in the not too distant future.”
($1 = 0.8039 pounds)
Additional reporting by Claire Milhench Editing by Jeremy Gaunt