With Emmanuel Macron’s comfortable, yet predictable win over Maine Le Pen, we look back at its effect on markets and potential opportunities on the horizon.
Initial Rally – April
Following the election of Emmanuel Macron as President this Sunday, market reactions have varied. Macron’s first round domination coupled with encouraging opinion polls magnifying the likelihood of a Macron presidential triumph meant markets had already priced in this best-case scenario prior to the weekend’s vote meaning French and European equities rallied, the Euro appreciated and French bond spreads tightened. Putting this in perspective, the movement over the four day period (21st – 25th April) saw the CAC 40 up 4.5%, MSCI Europe up 2.5% and the Euro/USD Spot appreciate 2.4%.
Source: Bloomberg (Euro/USD)
Revaluation – Monday May 8
Following the election and given what markets had already priced in, there was little room for further gain. The CAC40 saw an initial sell off of 106 basis points raising concerns of a “buy the rumour, sell the fact” reaction, which was later offset by a partial recovery in the index of 65 basis points. The Euro has seen the greatest volatility as investors looked beyond the French Election. The Euro/USD Spot has depreciated as investors await the latest US CPI figures to be released on Friday providing a further indication of the likelihood of the FED increasing interest rates. The Euro also depreciated against commodity currencies as investors hedged their exposure to recovering prices.
Macron’s victory has provided some breathing room for those concerned about the rise of populism in Europe and is likely to give a further boost to risk sentiment in the short-term.
Whilst focus has shifted away from France, emphasis on the upcoming legislative elections should not be overlooked. The outcome is paramount to the ability of Mr Macron to govern the country and, at present, there is much uncertainty. Extrapolating results from the first round of the presidential election would suggest that the probability of a hung parliament is high. However, an OpinionWay poll for Les Echos on May 3 estimated En Marche! could win between 249 -286 seats, just short of an absolute majority of 289 seats. With this uncertainty and the pullback in equities on Monday it is likely that, should evidence appear that Macron could gain a majority parliament, French equities may see a further appreciation in value. With regards to the Euro and bond spreads, we see the Euro appreciating modestly over the year and bond spreads remaining fairly stable.
The next five years are very important for France. Should Macron fail to implement his policies it will only be a matter of time before France will be dealing with a more mainstream Front National and anti-establishment forces. This would have a devastating effect on France and see the likelihood of ‘Frexit’ increase.
Alternatively, if Macron follows through with the promises from his presidential campaign, France will provide some good investment opportunities over the coming years.
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