European elections: centrists struggle but no breakthrough for the far-right

28/05/2019

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The European Parliament elections on 23 May produced damaging results in varying degrees for both the European Parliament and the main parties in the UK. Bethany Payne, Portfolio Manager, Global Bonds, explains the main points and provides a brief assessment of the impact on the markets.



Voters typically punish the ruling party at the European Parliament elections and this year proved no different with both centre-left and centre-right parties losing ground and no longer able to jointly form a ‘grand coalition’. While most of the main parties were perhaps relieved that the outcome was not as bad as some predicted, the euro was stable as the overall result was close to forecasts.

Protest votes in the UK, however, led to a catastrophic result for both the Labour and Conservative parties. Both lost seats to Nigel Farage’s Brexit party and the Liberal Democrats, who had concentrated their campaigns on whether the UK should leave or remain in the European Union (EU).

This change in voter attitude, away from the ambiguous Brexit policies from Labour and a failure to deliver Brexit from the Conservative party, show a desire for leaders who will guarantee results. The Conservative leadership contest demonstrates this, with candidates who – despite understanding the risk of bringing down their party – are running on hard Brexit campaigns. Labour have also moved towards supporting a second referendum in a bid to gain back supporters, albeit at the cost of their leave supporting voters. The pound extended losses as the risk of a messier ‘no deal’ Brexit increased.

What are the implications?
A more fragmented European parliament will likely make agenda and policy setting harder, Brexit negotiations less clear and, appointment of the Commission President a lengthier and less straightforward process — while the process favours the centre right EPP* selected Spitzenkandidat**, Manfred Weber, to become Commission President, the process has been denounced by the French President, Emmanuel Macron.

Thus, at a time when there is need for a greater coalition of parties to form a majority and, a greater need to coalesce around a leader who can piece together institutions and be a unifying figure, the choice of Commission President will be closely fought. For now, markets will wait; for groups to form ahead of the leaders’ summit on 20-21 June and then to see who Europe’s top jobs will fall to.

As for the markets, the next few days should be relatively calm given a quiet week on the data front in the UK. However, risk markets may become spooked by emboldened Brexiteer candidates as they start their internal campaigns for Conservative Party leadership. In addition, focus will be on the tension between the European Commission and Italy — according to Bloomberg headlines, the Commission is considering fining Italy $4bn (c.€3.5bn) over ongoing debt issues.


Glossary

* EPP: founded in 1976, the European People's Party is a European political party with conservative and liberal conservative member parties. A transnational organisation, it is composed of other political parties, not individuals.

** The German term Spitzenkandidat traditionally refers to the lead candidate of a party.




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  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
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Janus Henderson Institutional UK Gilt Fund

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  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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