French voters go to the polls this Sunday to elect a new President. They will almost certainly have to vote again in a second round on 7th May before a winner is declared. Who will that be and what will it mean for markets?
And The Winner Is … Probably Emmanuel Macron. The greatest uncertainty concerns the first round this Sunday. Four of the eleven candidates have strong support. Emmanuel Macron and Marine Le Pen have each polled consistently 23%-24% over the past fortnight. Francois Fillon and Jean-Luc Melenchon have typically scored 18%-20%.
Thus, it looks like a Macron-Le Pen contest in the second round which the polls show Macron winning comfortably. Ironically, the polls also show that Macron may only just scrape into the second round but then beats all the frontrunners by a wide margin. In contrast, Le Pen is highly likely to get through the first round but then loses to any of Macron, Fillon or Melenchon.
After the UK referendum and the US election, the key question is what could go wrong. In fact, a surprise is less likely in France than the UK or the US. The two-round voting system acts against a rogue result. Voter registration closed last December so there will be no last-minute surge of protest voters. And although Jean-Luc Melenchon has risen in the polls, it was at the expense of another left-winger, Benoit Hamon.
Finally, of the six likely outcomes of the first round, only one – Le Pen versus Melenchon – would cause big waves. Both are anti-EU candidates. Macron and Fillon are broadly centre-right candidates with similar policies and both should beat either Le Pen or Melenchon in the run-off
Two causes of mild concern, though, are don’t knows and no shows. More than a quarter of voters are undecided and nearly 30% are unsure they will vote at all. However, voter uncertainty is falling and likely turnout is rising in the final week.
If Macron were to win, then he would seek to take France in a liberal, pro-EU direction. He promises to cut corporation tax, to spend €50bn on public investment and to reform pensions and labour markets. However, as an independent, he would not have a power base in the lower house of parliament. Thus, he may struggle to get his policies into law.
The Collective Wisdom Of Markets. Despite all attempts to talk up the risks of the French election, the markets are calm under stress. The OAT-bund spread has risen; the same is true of the sovereign CDS spread; the CAC 40 has slightly under-performed the Euro Stoxx 50 this year; implied vols on euro options have risen. However, none show signs of panic and all are a long way below 2011-12 peaks.
In our view, this opens a brief window to buy French assets at attractive levels. If Macron or even Fillon make it to the second round, then expect financial markets to return to normal levels. Uncertainty levels would fall sharply. There would be a pro-EU leader in France and even the prospect of much-needed structural reforms in the French economy.
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