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Eurozone politics to play a significant role for markets in 2017

The Eurozone politics is expected remain a significant part for the markets to consider in 2017. National elections will be held in Netherlands and the France in the first half of 2017 and in Germany during September this year.

On the other hand, the UK government has hinted it will initiate Brexit negotiations before the end of 1Q17, leaving what both sides agree is a tight 2-year window to achieve a deal.

After the surprise results in the United Kingdom and the United States during 2016, the next 12 months will provide Continental Europe with the opportunity to provide similar upsets, in large part because of rising populism among the electorate. December’s Italian referendum, which had a high (60 percent) turnout, and effectively ended Renzi’s premiership, was an emphatic vote against the establishment and confirmed this shift in the European political landscape.

This may also result in the Italian election being brought forward into 2017 rather than 2018 as originally expected, further complicating an already busy political calendar. Recent Populist Party support in France and the Netherlands has been hovering at 30 percent, and around 12 percent in Germany. It is clear, therefore, that none of these parties are yet able to form governments on their own. Yet, as the referendum vote in Italy has shown, the momentum is clearly with those calling for change (on immigration, opposition to the euro, and in some cases withdrawal from both the EU and the euro), reported Lazard, an assets management firm in its research note.

If populism continues to grow across Europe, further election successes for populist parties may unsettle markets. Ironically, the conflux of conflicting interests may ultimately culminate in a shock that could in our view result in a healing process that would be positive for the region’s equity markets over the longer term, which is the ultimate reflection of short-term pain for longer-term gain, they added.

Lastly, Lazard in its research note mentioned that at the national and supranational level, an impending sense of crisis may encourage moves to address some of the euro zone’s structural flaws. Some companies where the current market structure is unviable could be poised to benefit from a change in political and economic regime, potentially presenting a significant value opportunity as the environment changes.

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