Turkey

Numerous elections are coming up—like tomorrow in Holland, as the country is oftentimes called in colloquial speech. The use of the term “Holland” as pars pro toto for the country Netherlands has been common since the 17^th century when the county Holland came to be the most influential province in the Netherlands. The fact that with the capital Den Haag and the economic center Rotterdam two of the most important hubs are located in Holland attests to the major significance of this province to this day.

436, Je maintiendrai—I will maintain
The country’s Act of Abjuration—its declaration of independence from Spain—in 1581 is considered the birth of its independence, the Treaty of Westphalia in 1648 confirmed the country’s independence internationally. The Kingdom of the Netherlands thus counts among the oldest players in the currently crisis-ridden orchestra of EU countries.

The constitutional democracy in Holland (the Netherlands are marketing themselves under this term in the tourism industry, although this is not popular with everyone in the country—I stick with this term for now) is established, has an extremely diverse landscape of political parties, and we assume that the Netherland’s motto is indicative of the country’s direction: “Je maintiendrai—I will maintain.”

436 years—this is how old “de Nederlands” are. Companies this old are rare. And the Netherlands are a democracy with an extremely diverse landscape of political parties. There is, for example, something that isn’t as established yet in Germany: parties such as D66, focused on specific constellations. Not the same old same old, but rather a movement which is pulled out of the drawer when need be. Just google “D66.” A classical response when the populist paradox takes effect: since everyone is always talking about populists, the silent majority gets sick and tired at some point… Positive surprises are possible.

Current assessment
As of today, we believe it’s not likely that we can deduce from the number of votes for Geert Wilders tomorrow how Madame Le Pen will do in the French election. And the election in North Rhine-Westphalia (NWR), which oftentimes is seen as early indicator for the federal election in Germany, is still far away from a stock market perspective.

Angela Merkel found out that the opportunity to discuss Steve Bannon’s opinions directly at the entrance of the White House was thwarted by the Weather God. Winter storm Stella has disarrayed the appointment book. Maybe it’s a good thing that the election in Holland is over before Mrs. Merkel encounters the new U.S. administration. Her unusual solidarity with the Dutch in regard to the current problems with Turkey is highlighting that it could quite realistically come to a change in position and unexpected moves even in Berlin.

Risks
We believe that due to the present price increase there is a higher probability of unexpected setbacks.  As a result, our cash quota of 15% is higher than in the past months.

In addition, we continue to be cautious with the U.S. dollar and the British pound. We have hedged our currency risk regarding these two currency zones quite largely. We don’t want to suffer currency losses when the elections in Europe turn out positive from a stock exchange perspective and as a result the euro rises significantly compared to all currencies.

The euro will rise immensely when U.S. investors start participating largely in European stocks. They are at the doorway and have just not walked in yet. There is no other topic on U.S. stock exchange TV discussed as extensively as stocks outside of the U.S.  And Europe is named as a favorite over and over.

Reasons frequently cited for European stocks:
– significantly lower valuation than U.S. stocks (value)
– significantly weaker performance so far (buy the dip) and
– big aversion among U.S. investors (behavioral finance: be contrarian).
We agree with all three!

Safety precautions
When it comes to currency, it’s not always just about the difference in interest—hence, be careful! Many investors are overly long in the dollar and would suffer big currency losses if the exchange market shifted in favor of the euro. We aren’t focused on investments outside of Germany/Switzerland, but large currency shifts can impact areas where you would not expect it initially. Hence our recommendation: don’t drop stocks, but be cautious at the currency front. 

After last year’s experience we don’t want to comment on which election results the stock markets will like. We’d rather continue to focus on well managed companies in business areas which simply have good prospects regardless of Trump, Wilders, and Le Pen. And there’s enough of those. There haven’t been big changes in our portfolio. Our stocks do so well that even with a cash quota of 15% we haven’t had any difficulty so far to achieve a performance on the level of the indexes DAX, STOXX EUROPE 600 or SMI.

The litmus test for the stock markets is yet to come—France.
More about this topic in due time.