French Presidential Elections
First round results suggest reduced risk
Emmanuel Macron and Marine Le Pen will be the two candidates in the second round of the French presidential elections, presenting voters with a clear choice on Europe and leaving the French political landscape profoundly changed.
The accuracy of first-round polls, a solid participation rate, the large spread between second-round voting intentions for Macron and Le Pen, and the emergence of a Republican Front point to limited risk of a surprise Le Pen win.
We expect these developments to be positive for European assets but highlight that while reduced, some risk is still present, and we keep our portfolio positioning unchanged.
Emmanuel Macron and Marine Le Pen will be the two candidates taking part in the second round of the French presidential elections on May 7th, having received 23.9% and 21.4% of the first-round vote, with a participation rate just above 78%. These results point to a reduced probability of a disruptive second-round outcome, which should be positive for European assets.
We have highlighted that the real risk associated with the French elections has been the possibility of putting the euro or even the European Union project in question. This would require the win of a Eurosceptic candidate at the presidential elections, as well as the ability to then obtain a sufficient majority in parliament to hold a referendum on the matter, and eventually to win it.
While opinion polls have consistently pointed to a limited probability of a Le Pen election (showing a 20-point lead for Macron), concerns have persisted, influenced to an extent by the upsets in the 2016 UK and US votes. The possibility of a large polling miss, combined with a low participation rate that could help Le Pen, kept many investors cautious. In fact, considering the evidence from the first round, neither of these conditions appears to be in place: polls proved to be a good guide to the actual results, while the participation rate remained fairly high. Similar to what we observed in the recent elections in the Netherlands, while the rise of Eurosceptic parties cannot be denied, their ability to outperform expectations by a large margin and rise to power should not be overestimated either.
An additional factor limiting the risk of Marine Le Pen significantly outperforming expectations in the second round is the emergence of a Republican Front against the Front National. This development was made clear by the concession statements made by the candidates of both traditional parties, Francois Fillon and Benoit Hamon, who expressed their support for Emmanuel Macron in the second round.
While we see the Le Pen risk as further reduced after the first round given the above, it is not entirely absent. A degree of uncertainty between today and May 7th is bound to remain and the possibility of a surprise outcome exists in any election. From the beginning of the process, we saw the risk associated with the French elections as a tail risk rather than as a challenge to our base case. As such, we have kept our portfolio positioning broadly unchanged but chose to add a short-dated hedge to account for the low-probability but potentially high-impact event of a disruptive outcome. Consistent with this rationale, we intend to keep our positioning unchanged over the next two weeks.
Finally, it is worth noting that a Macron victory on May 7th will be neither the end of Eurosceptic tendencies across the continent, nor any kind of guarantee for a stable and functioning government in France, given the amount of uncertainty surrounding the parliamentary elections. The French political landscape is clearly changed and tensions seem certain to arise within the two traditional parties after the first round results. But we see this as a much more manageable risk from an investment perspective than the existential risk that a euro membership referendum could pose.
The focus should therefore now turn to the Eurozone’s economic fundamentals, which remain encouraging - as shown by macro data that have continued to surprise on the upside, further reinforcing our view that the European economic recovery is on track.
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