Equity vs. bonds in investor reaction to Dutch elections
Reactions to the recent Dutch elections suggest Europe, rather than domestic politics, remains the key issue, although the impact may vary between equity versus bond investors.
The consensus view of the Dutch elections on 12 September is that it returned a more centrist and pro-Europe group of MPs. Negotiations to form the country’s next government focused on the right-of-centre VVD party and its counterparty left-of-centre Labour party PvdA, as together they got 79 out of the 150 seats in Parliament. Both parties are committed to the EU as offering the best way forward for ensuring Dutch interests.
That commitment was underlined in the annual Prinsjesdag, effectively the Budget speech given by Queen Beatrix every third Thursday in September. Her speech this year took place after the election, when the country was technically in the hands of a caretaker government. Yet the speech reiterated the need to ensure a stable euro, including commitment to austerity to ensure Europe’s debt is reduced and Dutch economic prospects are protected.
Threat to credit rating
However, the question facing investors is to what degree the outcome of the election ought to change their outlook on investments in Dutch equity, or exposure to the country’s debt, given its membership of the eurozone and associated threats to its sovereign credit rating. Moody’s lowered its outlook on the country’s sovereign debt to ‘negative’ over the summer.
Francis Ellison, investment specialist in Threadneedle’s European Equities team said the election outcome was unlikely to affect the view of the market.
“We believe cooperation between member states is required to solve the eurozone crisis. It is encouraging to see nationalist eurosceptic parties did not win a big vote. We have holdings in several companies listed in the Netherlands. They are mainly global operations rather than those with a domestic focus – for example, Unilever – and the election result has not affected our views on them.”
Times are likely to be tougher for companies with a domestic focus, according to an analysis of consumer spending power by Joost Beaumont, part of the macro research team at ABN Amro’s Group Economics. With the government looking to limit deficit spending even as GDP growth weakens, he wrote, the upshot will be higher taxes.
“The focus will be on increasing tax revenues, which will result in a rise in the tax burden of around €10bn; €3.75bn will be for companies and €6.25bn for households. The main income generating measures are a hike in the rate of the lowest income tax bracket as well as a 2% increase in the VAT rate [as of 1 October]. Meanwhile, the commuting allowance will no longer be tax free, while tax brackets will not be indexed for inflation. Other measures are rises in excise duty on tobacco and alcohol and in health care premiums.”
Tradeweb data suggests there was indeed concern in the bond market around the election. On the afternoon of 13 September, when the results were announced, the bid yield on the Dutch ten-year bond closed at 1.819%. The following day, bid-yields closed on 1.940%. Thereafter followed a slight flattening of the yield, which was at an intra-day bid-yield level of 1.886% on 20 September.
The yield movement took place in the context of a further sale of ten-year debt by the Dutch State Treasury Agency (DSTA). On 11 September, the day before the election, it sold €2bn ($2.55bn) of the 2.25% July 2022 bond, at an average yield of 1.846%.
That bond was first issued via the Dutch Direct Auction (DDA) method in February 2012, with the size of the book at the time in excess of €9bn. The Tradeweb data points to a rising yield from early August through to 20 September, which suggests investors demanded increasing returns.
However, in relation to the official inflation rate across the eurozone, measured by Eurostat in August at 2.6%, the yield level suggests that in real terms investors are still prepared to pay the Dutch government for the privilege of owning the country’s debt.