France's turn at the ballot box

E*TRADE Securities2

05/04/17

The political spotlight continues to shine, but this time it’s on the Avenue des Champs-Élysées. In what has turned out to be a historic presidential election, centrist candidate Emmanuel Macron won the first round vote on Sunday, April 23, followed by far-right candidate Marine Le Pen. The result marked the end of an era in France, with Macron and Le Pen taking down the ruling Socialists and the center-right opposition Republicans, parties that ran France’s political scene for decades.

Pundits noted the possibility of an anti-euro, anti-European Union (E.U.) presidency had global markets skittish heading into Round 1.1 Ramifications of this Sunday’s second runoff may be felt far and wide, so this week we take a look at what the two outcomes could entail for market prospects in France and the world.

Markets take a breath

The victory for pro-euro and pro-E.U. Macron in Round 1 put markets at ease and sparked a global relief rally.2 Macron’s strong showing, and subsequent Socialist and Republican party endorsements, has opinion polls tabbing him as the likely winner over Le Pen in Round 2.3 Assuming Macron does prevail, there are several areas that could interest market observers:

  • Euro and E.U. find an ally. Macron has been clear in his support of the euro and the importance of the E.U. Pundits believe that support could lead to greater stability across the Eurozone, especially with Britain on the way out, and a reenergized E.U.4     
  • Trade doors could open. Macron appears more than open to solidifying France’s relationships with its existing trade partners and establishing new ones. Notable is his support of the Comprehensive Economic and Trade Agreement (CETA), a Canada-E.U. pact that would eliminate 98% of the tariffs between the participants. 
  • French corporates get one of their own. Market observers expect Macron, a former banker, to implement a business-friendly pro-growth, pro-stimulus agenda.5 He has pledged to invest as much as €50 billion in large-scale national projects involving agriculture, energy, the environment, and health care, among other areas. He’s also proposed a Buy European Act, which would limit public contracts to companies with at least half of their operations in Europe.

On the other side, Le Pen’s France-first platform includes shades of economic protectionism, including a tax on companies hiring foreign workers, and closed-door immigration policies. Aside from potentially bringing uncertainty to the Eurozone with a “Frexit” proposal, some market observers believe a Le Pen presidency may cause foreign investors, who own 60% of the country’s government bonds, to consider taking their money elsewhere.1

But no fait accompli

This being said, there are no guarantees in politics, and much could change between now and when the final ballots are counted. Never mind that when it comes time to actually govern, there’s a trip through parliament looming for the winner’s agenda.

For France, the election represents a significant change in its political status quo. For investors, the status quo playbook—focusing on the long-term view relative to their goals and risk appetite—can help put geopolitical turbulence in perspective and evaluate what’s in front of them. And currently, Europe appears to be a region where investors are finding attractive valuations and growth potential after years of macro instability—year to date, the MSCI Europe Index is up 10.83%.6 On France’s part, its stock exchange, the CAC 40 Index, is up a healthy 9.09%7 this year.

Market observers predict a Macron victory could further strengthen this tide, whereas a Le Pen victory could bring pronounced volatility. In either scenario, focusing on market fundamentals like earnings and growth is one way to help weather political storms.

 

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1. Gold, Riva. “What would a Le Pen Victory in France Mean for Markets?” The Wall Street Journal, 23 Apr. 2017. https://www.wsj.com/articles/what-would-a-le-pen-victory-in-france-mean-for-markets-1492858801

2. “French elections: Wall Street joins European relief rally,” BBC News, 25 Apr. 2017. http://www.bbc.com/news/business-39688501

3. de La Hamaide, Sybille, and Blamont, Matthias. “France’s Macron favorite for presidency in runoff with Le Pen,” Reuters, 24, Apr. 2017. http://www.reuters.com/article/us-france-election-idUSKBN17O0DG

4. Sindreau, Jon and Fairless, Tom. “How a Macron Presidency Could Bring About ECB Tapering,” The Wall Street Journal, 24 Apr. 2017. https://www.wsj.com/articles/how-a-macron-presidency-could-bring-about-ecb-tapering-1493045722

5. Viscusi, Gregory and Deen, Mark. “Macron Offers Something for Everyone in French Policy Plan,” Bloomberg, 2 Mar. 2017. https://www.bloomberg.com/politics/articles/2017-03-02/macron-unveils-program-to-cut-french-labor-costs-boost-growth

6. As of May 2, 2017, according to https://www.msci.com/end-of-day-data-search. The Morgan Stanley Capital International Europe Index (MSCI Europe Index) measures developed market equity performance in Europe according to market capitalization.

7. As of May 2, 2017, according to http://quotes.morningstar.com/indexquote/quote.html?t=XAMS:PX1. The Euronext Paris CAC 40 is a benchmark stock market index that tracks the 40 largest stocks in France according to market capitalization.