First round of French presidential elections: The financial markets point of view
The result of the first round of the French presidential elections marks the end of a uniquely suspenseful episode in the history of the Fifth Republic. Never before had four candidates stood so close in the polls - a situation that made it impossible to predict with certainty which two would make it through to the second round/ However, this time, the opinion polls were not wrong against the contrary predictions of big data.
The main lessons of the 1st round
The participation rate was high (78.7%) and comparable to the scores obtained at each previous presidential election. The geographical distribution of the vote reflects a division of the country between east and west.
The breakdown of votes confirms what the Brexit referendum and the election of Donald Trump had already taught us: the social divide seen in our societies is now being reflected in the overturning of traditional political balances and the search for new solutions :
- The decimation of the traditional parties that had dominated French political life for 40 years: for the first time, the founding party of the Fifth Republic has not made it to the second round. As for the Socialist Party, it only just managed to stay above the 5%. mark
- The rise of extremes, which now represent more than 40% of the French electorate: the far right, with 21.5% of the vote, continues its steady growth since 2002, while the far left has achieved a remarkable breakthrough.
- Finally, Emmanuel Macron, with 23.8% of the vote, has achieved the feat of wining the most votes in the first round, only one year after the creation of his movement, without ever having stood for any other elected office.
This election shows us that we will now have to rely on multi-party coalitions to govern the country, since the divisions today are so sharp.
At the same time, the result is consistent with a global trend observed in most developed countries :
- the rejection of elites, opposition to established parties and the rise of populism;
- the refusal of globalization and of the widening income and wealth inequalities, which exacerbate the “social fracture” and consequently aggravate political instability.
From this point of view, it is worth bearing in mind that the environment of political instability and rising inequalities is one of the long-term “brakes” on growth in the developed countries.
What should we watch for in the coming weeks?
- The debates of the second round, for more accurate prediction of vote transferral and the risks of high abstention rates,
- The composition of the government on 14 May,
- The results of the parliamentary elections on 18 June, which will determine the president’s ability to govern during the next mandate.
While the results of the first round have led to a dissipation of the more extreme risks, the central stake of the legislative elections in June will be the governability of France and therefore its ability to embark on any significant reforms.
Our fundamental prediction of a return to global economic growth is fully maintained, with a balance of risks that could become positive if the political risk factors do not materialize in 2017.
Beyond the challenges looming over the structural environment (durably low growth rates, high public and private debt), the prospects for growth are extremely positive. In fact, our fundamental prediction would even be reinforced if the initial trends observed in the financial conditions of the eurozone are confirmed. The “balance of risks” remains balanced, but it could become positive if the results of the French and German elections open the way for a “genuine” relaunch of the European project, which would contribute to amplifying the multiplier effects on world trade.
Impacts on the markets and management strategies
The results of the first round of the French presidential elections have brought a degree of relief to financial markets. The duel between Macron and Le Pen is currently pointing towards a victory of Emmanuel Macron in the second round. The fears concerning the risks of seeing a populist party at the head of the French State and of France leaving the eurozone are dissipating.
The risk premium integrated in the price of French – and, to a lesser extent, European – assets in the run-up to these high-risk elections is lessening..
The first signs of this relief can be seen in the performance of the European currency. In particular, the euro is gaining ground on the dollar. This relief is also perceptible in the French debt market, where the risk premium has dropped significantly (-20 bp on opening).
The first-round results largely benefit the risk asset classes. The CAC 40 rose by almost 4% on opening, and credit spreads for the “category” and “high-yield” synthetic CDO indices fell by 5 and 17 bp respectively.
By contrast, German debt, which had benefited from investor movement, is seeing its rates rise following the calming effect of the first round.
After this normalization phase that we are witnessing at present, the markets – both for fixed income and equities – should in the short term be guided more by the very favourable economic climate and the fundamentals of companies. In this respect, the publication of companies’ first-quarter results should be the main factor determining the trends of the equity markets.
Given this market configuration, we are maintaining our investment strategies. In terms of asset allocation, we are preserving our preference for risk assets in our portfolios, giving priority to equity over fixed income assets. On the equity markets, we anticipate that the European markets will outperform the American markets. And in the fixed income markets, we are maintaining our under-exposure and our preference for credit over sovereign debt.
However, we must remain vigilant with regard to the result of the presidential elections. We must also not neglect the parliamentary elections, and in particular the question of the majority that the new president will have in the French parliament. Nevertheless, this uncertainty should be less significant for international investors, since it is more of an internal question for France, with effects over the medium term. Watch this space.