Exciting times. Credit:Algebris Analysts are hopeful for benign results in the polls, all of which feature strong populist, non-mainstream challengers, such as Geert Wilders of the radical right, the virulently anti-immigrant Dutch Party for Freedom, and Marine Le Pen, leader of France's National Front party, who has promised to put France first by freeing it from the "tyrannies" of globalisation, Islamic fundamentalism and the European Union. There are hopes that the populist wave may have peaked. There has been a sharp drop in polling support for Germany's populist, anti-euro, anti-immigration party AfD. Even the weekend's electoral drubbing of Pauline Hanson's One Nation party in Western Australia suggests that the course of history does not inevitably flow in only one direction. The consensus is that Geert Wilders, the leader of the Dutch Party for Freedom, will not claim victory in this week's Dutch elections. But it will be "a sort of bellwether for the other key forthcoming elections across Europe", according to analysts at Morgan Stanley.

NAB head of FX strategy Ray Attrill agrees. European v US sharemarket valuations are near a five-year low. Credit:Morgan Stanley "The worse (or better) the showing of Geert Wilders, the more markets – rightly or wrongly – will dial up or down their expectations for Marine Le Pen being victorious in the final round of the French Presidential elections on May 7, assuming she makes it through to the run-off of course," Mr Attrill said. "My bet is that he'll fare relatively poorly and if so that it will be 'risk positive', and good for the euro." But after the surprises of 2016, including the UK vote to leave the European Union and Donald Trump's election to the White House, most experts and investors are treading carefully.

"After Brexit and Trump, investors have entered 2017 cautiously and are not willing to take any chances on Europe's upcoming elections," Algebris portfolio manager Alberto Gallo writes. Indeed, investors have already started pricing in political risk. Morgan Stanley analysts note that European sharemarkets have underperformed against other regions. Based on expected earnings in the coming 12 months, European equities are the cheapest they have been against their US counterparts in almost five years. Similarly, investors are demanding lower prices for French bonds compared to other major European debt offerings. The yield spread between French and German 10-year securities, for example, is around 0.35 percentage points wider than one would it expect it to be based on fundamentals, the broker says. Morgan Stanley Wealth Management strategists expect "a largely benign" political outcome in Europe, but they also note that after two months of market "euphoria", March "may prove sobering".

They are putting a 30 per cent probability on "the worst-case outcome of a Le Pen election win". That's high enough odds for them to be neutral on European shares, despite the region's improving prospects for corporate earnings and economic growth. As such, the MS team are hedging their exposure to the euro – what they call a "partial political hedge". They point to the experience of the pound, which plunged by more than 10 per cent in short order once it became clear that the "leave" vote had won. An equivalent two standard deviation move in the euro would push it below US90¢, from $US1.07 now. Algebris' Gallo believes the market should not "fret about Frexit", the portmanteau that riffs on "Brexit", the name given to last year's British referendum on exiting the EU. He is more convinced of an establishment win in France, giving Ms Le Pen only 8 per cent chance of victory in the second round elections in early May. And this presents an opportunity for investors. "There's growth and reflation at the end of the political minefield," Mr Gallo writes.

Crucially, even were Ms Le Pen to win the presidency, Mr Gallo considers it a very low probability of her progressing on what would be her most disruptive goals of exiting the euro. To do so, she would need approval from both houses of France's bi-cameral parliament, in which her party does not hold majorities. "We think markets are over-pricing the chance of a Le Pen victory and currency re-denomination risks," he said. "Strong macro data and a recovery in corporate fundamentals make Europe a good investment after the political dust settles," he said. "Growth data is solid, inflation is normalising, investment is coming back to periphery countries which implemented reforms and banks are starting to lend again." While this year's elections may not trigger the beginning of the end for the European project, economists and analysts remain concerned around the long-term sustainability of the monetary and political union in which there is growing tension between a single currency reigning over a multitude of potential and actual growth rates among member countries. Or, as Bank of America-Merrill Lynch strategists put it: "The eurozone and the euro may be a cyclical buy, but it is still a secular sell".