A Dutch Lesson in Gridlock

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.

It is the end of an era. Mark Rutte, the Netherlands’ longest-serving prime minister (PM), is stepping down as leader of the centre-right People’s Party for Freedom and Democracy (VVD)—the largest party in the Dutch parliament—and has announced he will not run for another term at the next election following his government’s collapse. He is still in office as caretaker PM for now, but with the vote due by November, the Dutch will have a new premier for the first time in 13 years. We don’t know who that will be, let alone how the next election will shake out—especially since the ascension of the conservative upstart Farmer-Citizen Movement (BBB) party presents a new wildcard. For now, though, we think a look back at Rutte’s premiership illustrates a few useful lessons for global investors.

It Doesn’t Seem to Us Markets Sweat Ideology Much

Though Rutte has been atop Dutch politics for more than a decade, his four governments weren’t all the same. Here is a snapshot:

• 2010: The VVD and centre-right Christian Democratic Appeal (CDA) ruled as a minority government with the support of the nationalist Party for Freedom (PVV)^[i]
• 2012: The VVD and centre-left Labour Party (PvdA) formed a coalition government^[ii]
• 2017: The VVD, CDA, centrist Democrats 66 (D66) and centre-right Christian Union (CU) joined forces to create a four-party coalition^[iii]
• 2021: The parties in charge since 2017 agreed to get back together^[iv]

Based on our review, these developments suggest the most ideologically aligned political combination fell apart in less than two years; the arrangement between ideological opponents was the most stable and only government to last a full term; and the seemingly rickety, complicated four-party setup repeated itself despite its 2021 collapse over a child benefits scandal.^[v]

Now, according to our research, nations with parliamentary systems often have coalition or minority governments—and given the rise of eurozone populism over the past 12 years, formerly fringe parties have increased their presence in legislatures across the Continent.^[vi] We think that trend has made it even more difficult for a single party to win an outright majority, meaning potential partners must negotiate to arrive at a workable governing agreement. Based on our observations, this process takes time and forces compromise—a recipe for political gridlock, in our view, which tends to dampen sweeping legislative efforts.

We don’t think this political system has shown to be a major negative for stocks. Consider how Dutch stocks have fared relative to broader eurozone markets during Rutte’s governments. (Exhibit 1)

Exhibit 1: How Dutch Stocks Fared Under Rutte

Source: FactSet, as of 12/7/2023. MSCI Netherlands Index and MSCI European Monetary Union Index returns with net dividends, in GBP, 13/10/2010 – 5/11/2012, 4/11/2012 – 26/10/2017, 25/10/2017 – 10/1/2022, 9/1/2022 – 7/7/2023.

No Government? No Problem, in Our View

Another characteristic we have observed about Rutte’s governments: They often took a long time to come together. The 2017 government took 225 days, which, at the time, was the longest in Holland’s history.^[vii] However, Rutte’s fourth government topped that, requiring 299 days before being sworn into office.^[viii]

We don’t think these long periods without a government weighed on stocks, though. In 2017, Dutch stocks rose 11.2% between election day in March and the government’s formation in October—just a tad behind eurozone markets’ 12.3% over the same period.^[ix] During the record-long stretch of no government from 2021 – 2022, Holland (14.6%) outpaced the eurozone’s return (9.4%).^[x]

We think this demonstrates how no government—which usually means the incumbent stays in place to fulfill basic tasks (e.g., overseeing the budget) as Rutte is doing now—isn’t automatically problematic for markets. In our view, this, too, is a form of gridlock, as caretaker governments have no mandate for big legislation, which we think stocks recognise. In our view, this is useful to keep in mind since the latest polls show Dutch politics are even more fragmented today.^[xi] The BBB’s emergence may complicate coalition talks following autumn’s election, as the populist party looks poised to have a prominent seat at the table according to political observers we follow.

The Benefits of Gridlock

In our view, stocks generally prefer political gridlock because it decreases the likelihood of major legislative change, which creates winners and losers. As the behavioural finance concept of prospect theory teaches, the latter tend to feel the losses over twice as hard as the winners relish their gains—so that net negativity can weigh on sentiment (and stocks). We think gridlock lessens this risk.^[xii]

Now, we aren’t saying gridlock is always and everywhere a positive. Our analysis of capital markets globally suggests some nations could benefit from structural reforms (e.g., reducing bureaucratic hurdles for companies to do business), and gridlock can make it tougher to implement those changes. But since gridlock keeps the political status quo largely in place, our research shows businesses can plan and invest accordingly in that environment—and forward-looking stocks, which our research finds don’t like uncertainty, can move on and focus elsewhere.

In Holland’s case, we think a persistently gridlocked Dutch government freed the country’s stocks to move with regional and global forces. For example, eurozone-specific factors (e.g., 2010 – 2012’s sovereign debt crisis and regional recession) appeared to weigh on Dutch markets at times, but Holland outperformed the eurozone as part of stronger Northern Europe.^[xiii] More importantly, Tech’s global leadership for most of Rutte’s time in office was a boon for the MSCI Netherlands, as one semiconductor stock comprises over 40% of the index.^[xiv] To us, the Netherlands is a clear-cut example of how global factors trump local ones—worth remembering for globally minded investors.