CIO Viewpoint: Voting in france: a question of economics
After Emmanuel Macron’s first round victory in France, markets have refocussed on the positive economic picture. Like fears of a protectionist deluge from Donald Trump earlier this year, fears of nationalist ascendancy across Europe now look overdone. We look to economics to explain voters’ level-headed approach in recent polls. We continue to like European equities, and see opportunities for specific sectors ahead.
Head of Investments, Lombard Odier Private Bank
Markets have struggled with a high degree of conflict this year, balancing a rosy global economic picture against huge political risks. On 24 April, following Mr Macron’s victory in the first round of the French presidential elections, a relief rally signalled the former trend had gained the upper hand. Polling data now suggest France will follow Austria and the Netherlands in preventing an extreme nationalist leader from gaining power1. We retain the pro-risk positioning we have had in place all year, a stance which we feel economic releases continue to justify. Just days before France’s first ballot, the IMF upgraded its 2017 global growth forecast to 3.5%. Unemployment is at multi-year lows in the US and Europe; industrial production, trade and economic sentiment figures look strong; and early signs are that first quarter earnings are on track to meet high market expectations2.
Of course, it is too early to sound the death knell for populism in Europe. Extreme nationalist candidate Marine le Pen scored 21.5 of the French popular vote in April and could yet win the presidency in May. Support for populist parties in Italy, which faces elections in late 2017 or early 2018, is currently running at around 45%3. With traditional two-party systems dying out across the continent, it is not clear if a host of smaller, fragmented movements will be able to govern divided nations successfully. Most probably, populism will score its victory by the back door: by forcing mainstream parties to adopt many of its least distasteful policies as their own.
But an encouraging new trend seems to be emerging: politicians making impassioned pro-European arguments, and tackling nationalists on their home ground. For years, Europe’s leading politicians have sought to fend off populist threats defensively: by pointing out the chaos that would be unleashed by dismantling the European project. In contrast to the accepted doctrine, Mr Macron is seeking to win over French voters by calling for greater European integration. Mr Macron’s pro-European views were echoed in March by two parties which made large gains in Dutch general elections (D66 and GreenLeft). They also find their counterpart in Germany’s Martin Schulz, the Social Democrat’s candidate for Chancellor in September’s elections. A win for Mr Macron on 7 May would be the biggest test yet of whether Western democracy can face down the nationalist trend.
We have consistently held that the view that reason will prevail in Europe’s elections this year. We attribute this not only to the proportional nature of many electoral systems, but also to economic fundamentals. Although unemployment is much higher in Europe than in the US, where Donald Trump’s November victory stunned the world (eurozone unemployment was 9.5% in February, versus 4.7% in the US), income inequality in Europe is generally much lower. As economists Kate Pickett and Richard Wilkinson consistently argue, this fosters greater social cohesion4. We would extrapolate that it also helps counter the forces of extremism.
We remain optimistic that Europe will muddle through this year’s elections, and have been overweight European equities since mid-March, largely on valuation grounds. Last month this was a contrarian view; now Bank of America’s Global Fund Manager survey notes 48% of managers favour the region5. We believe Europe looks more attractive than the US or Japan, with a valuation discount largely centred on banks and oil companies, sectors where - in addition to more cyclical firms - we see opportunities. Of course, experience has taught us caution on the region, and much could still go wrong. History shows us that investors traditionally demand some discount for European stocks versus their US counterparts6. But if Mr Macron does indeed enter the Elysée Palace and make good on his reform agenda - and particularly if he is supported by a progressive counterpart in Germany- growth could accelerate, and the European Central Bank finally see its way to lifting interest rates. The big winners then may just be found among Europe’s unloved banks.
All data from official sources, and as of 26 April, unless otherwise stated.
1Opinion polls conducted by Elabe, Ipsos and Harris Interactive after the first round of the presidential election suggest Mr Macron will win the second round, garnering between 62% and 64% of votes.
2As of 26 April, almost 1000 S&P500 companies have reported results, with 76% surpassing bottom-line estimates.
3Polling data as of 21 April from ScenariPolitic, combining support for the Five Star Movement, Lega Nord, Italian Left and Brothers of Italy
4See The Spirit Level: Why Equality is Better for Everyone, Richard Wilkinson and Kate Pickett, Penguin 2010
5BAML Global Fund Manager Survey conducted during 6-12 April among 203 respondents with 593 billion US dollars of assets under management. Survey noted a net 48% of respondents overweight eurozone equities.
6Average discount since Thomson Reuters IBES data began in the mid-1980s is 2 points on the price/earnings ratio. Source: Wall Street Journal
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