What is your take on the electoral result in the Netherlands?

After the annus horribilis in which several elections resulted in unexpected outcomes (admittedly without the much feared negative impact on asset prices), this time we have had a result that is in line with recent polls and will not lead to a tremendous change in the policy and political approach of the country involved. That said, a negative aspect is the fragmentation across parties of the result (also expected), which will likely be a source of instability and difficulty for the government.

It remains to be seen how the incumbent premier, Mark Rutte, will try to form a new government. It seems clear that any coalition will involve at least four parties, ranging from the center-to-right to the left of the political landscape (generally, ‘Pro-Euro’); during the campaign, he repeatedly ruled out any possibility of repeating a coalition with Geert Wilder and his anti-immigration Freedom Party.

Do you think this could influence the outcome of elections in France?

Success breeds success: this was apparent last year with the rise of the ‘populistic’ movements across the globe.  This result could, therefore, suggest that a peak in the appeal of these ideas is behind us and that a more constructive approach to policy and politics and, above all, to Europe is gaining momentum. So, yes, in our view, it could have a positive influence on the French vote.

What is your assessment of the risk of a Euro break-up and how has it changed over the last few months?

A break-up of the Euro is, economically speaking, an unacceptable event. European Central Bank President Mario Draghi abruptly clarified this concept when he stated the fact that any country exiting the Euro would need to clear its Target2 balances first (which for Italy amounts to around €390 billion).

But what if Euro-sceptic forces start taking the lead in a number of countries? We think a useful analogy here is to imagine the Eurozone and Europe are a cyclist that is going uphill. They cannot stop pedaling until they reach the top of the hill (i.e., when everything is in order, and clearly we are not there yet) otherwise they will start to go backwards and will, eventually, fall down in a heap. This may appear a bit extreme: on some issues, the progresses and benefits of the currency and Union are clear; but there are other mechanisms, particularly in the field of sharing risks, solidarity and common policies, that still have to be resolved. And these have been put under severe pressure given the scale of the recent crisis. The cyclist must arrive at the top of the hill and commence the downhill journey before the next crisis arrives. Yet, if Euro-sceptic forces gain appeal and power in the Eurozone and Europe, we see an increased likelihood that our cyclist stops pedaling.

Last year, starting with Brexit, the probability of a ruinous standstill in Europe rose materially, although it is still considered a tail event. Higher spreads between OATs (the 10 year French government bond) and BUNDs (the 10 year German government bond) are the market’s assessment of that probability (which does not including credit risk or sovereign default risk). Meanwhile, the issue of a Euro exit, or adoption of a different currency, is a recurrent theme – most recently in the electoral positioning of political parties in Italy – is another perilous sign.

The Dutch electoral result has enabled this risk to recede a little, but there are a number of political issues ahead: elections in France, Brexit with the complication of a second Scottish independence referendum, the still unresolved Greek question, and possible political instability in Italy to name a few.

How can investors deal with geopolitical risk within a multi-asset approach?

Geopolitical risk remains, in our view, the main factor for investors to watch over the next few months. Financial markets are too complacent ahead of the wave of elections in Europe: equity volatility is reaching new lows even though the probability of a country leaving the Euro, as highlighted by the Sentix Euro Break-Up Index, is trending towards post Brexit levels.

If we also consider the uncertainties related to the execution of Trump’s policies in the US, and of his potentially unfriendly foreign policy for some Emerging Markets, we see significant risks of disappointment for financial markets. This also considering extended valuations in many developed equity and credit markets.

Therefore, we believe investors should consider implement hedging in an effort to partially offset the negative effects of geopolitical risk. There are multiple strategies available for investors: lowly correlated assets, such as gold; currencies that tend to behave as ‘safe havens’, such as the Swiss Franc, and, especially in case of rising risks in the Eurozone, the US dollar; or the use of derivatives to try to protect risk asset exposure. A multi-asset approach, which includes hedging among its investment strategies, can be beneficial in a period of rising geopolitical risk. It can efficiently combine the most effective hedging techniques, determining cost-efficient strategies for those risk events deemed most likely and impactful.

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IFM Correspondent

April 20, 2016: Yahoo on Tuesday announced its first quarter earnings which were better than what Wall Street had estimated. The company posted adjusted first quarter earnings per share of 8 cents, compared to 15 cents per share in previous year.  Gross revenue for the quarter also fell year-over-year, coming in at $1.09 billion, compared to $1.23 billion during the same period last year.

The company’s shares rose by almost 1 per cent to $36.66 in light volumes in extended trading on Tuesday. Addressing the media, Yahoo CEO Marissa Mayer did not give much detail on bidding. She said the company has made “substantial progress towards potential strategic alternatives for Yahoo”.

“Our board, our management team, and I are completely aligned on this top priority for shareholders,” she said. According to The Wall Street Journal, most of the bids came in the range of between $4 billion and $8 billion.

Yahoo said that its board has “formed a strategic review committee of independent directors to consider strategic alternatives for the company alongside its continued consideration of a reverse spin.”

“Since the launch of the process in February, management has worked diligently with the committee and its independent legal and financial advisors to engage with interested strategic and financial parties,” Yahoo said in its Tuesday release.

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