French Elections: What would Macron’s victory mean for markets?

Emmanuel Macron’s victory in the French presidential election would not be a surprise – but it would be a relief. It would reduce the heightened political uncertainty that has prevailed since Britain voted to quit the EU on 23 June 2016. We would expect stock market volatility to decline as political worries retreat. Against a benign macroeconomic backdrop, we are excited by the attractive valuations of European companies.

If the pollsters are proved wrong, and Marine Le Pen beats Macron in the second-round vote, it would rock Europe. The triumph of the avowedly anti-euro, anti-NATO and anti-EU National Front would be a greater shock than last June’s Brexit vote and Trump’s triumph in November.

A Macron win, by contrast, would mean the French have voted for stability. At 39, Macron would be the youngest-ever president of the French Republic, despite not being a member of the Assemblée Nationale and never standing for election. [1] However, the former investment banker and economy minister is far from a maverick, anti-establishment candidate.

Macron is promising economic reforms which are radical by French standards, but his victory would also reassert the international status quo. While Le Pen would threaten the eurozone and the EU, Macron wants to make them work, and work better.

FRANCE: THE ECONOMIC PICTURE

President Macron would inherit an economy that has been growing slowly since the 2008 financial crisis, lagging Germany, the UK and the US. Growth last year reached 1.1%, well below the EU average of 1.8%. [2] Employment remains a testing issue. France’s unemployment rate was 10% in December 2016. [3] Youth unemployment is nearly double that of the UK, with the latest reports for France putting the figure at 23.6%. [4] France has one of the highest public spending ratios among advanced countries at 57% of GDP. [5]

If Macron wins, he would push for a eurozone common budget managed by a eurozone finance minister. [6] He knows these proposals would be opposed in Germany, but he would strengthen his hand by reforming France’s economy and respecting the EU’s 3% budget deficit rule.

Pro-business, pro-growth policies are at the heart of Macron’s programme. The key proposals include:

• €60bn of cuts in public spending by 2022
• 120,000 fewer state jobs by not replacing retiring civil servants
• A €50bn stimulus over five years
• Training for the unemployed and a transition to a green economy
• A deficit below 3% of GDP, in line with EU requirements
• Negotiating a eurozone budget and EU-wide investment programme with Germany
• A cut in corporation tax from 33% to 25%
• Unemployment benefits extended to entrepreneurs, farmers, self-employed and those who quit jobs voluntarily
• 80% of households exempt from local housing tax
• Financial investment excluded from wealth tax
• Retirement age and pensions intact. [7]

How much of this would he achieve? As an independent, Macron is backed only by his ‘En Marche’ movement. He would be the first president of the Fifth Republic to be elected without the backing of a fully-fledged political party. [8]

Even if he wins, it remains to be seen if his supporters would achieve a majority in the French parliament when legislative elections take place in mid-June; he would need a majority (289 seats) in the Assemblée Nationale. It spells trouble when voters choose a parliament in opposition to the president. When that happens the prime minister, supported by the majority in the Assemblée Nationale, holds most of the executive powers. [9]

So, while Macron’s victory would reduce geopolitical uncertainty, we remain vigilant to short-term political risks – ie, if June’s legislative elections prove divisive.

This is not the only political event this year that could cause short-term volatility. There is a German Bundestag election on 24 September. Italy’s elections are not due until 2018, but they could be brought forward. Eurosceptic populist parties will grab media attention in both elections, but do not expect any major upsets.

In Germany, either the incumbent Angela Merkel, or the Social Democrats’ leader, Martin Schulz, should be Chancellor. Schulz is even more pro-Europe than Merkel, and his election would be greeted positively. In Italy, a weak coalition is the likely result, so no surprises there unless Beppe Grillo’s Five Star movement, the joker in the pack, wins.

WHAT CAN WE EXPECT FROM MARKETS?

Short term we would expect markets and the euro to react positively to the French election. But gains are likely to be modest. Markets have been pricing in a Macron victory since even before March when Dutch voters rejected right-wing populism.

By removing a threat to the future of the eurozone, we expect renewed confidence in the global economy. We foresee a continuation of the weak European economic recovery. Europe will not follow Trump’s intended reflation and European interest rates are not rising, unlike in the US. Inflation of 2% should help companies’ revenues and ensure that monetary policy remains loose in the eurozone.

Against this benign backdrop, European valuations are relatively attractive.

Last year, growing optimism about the US economy and fear of populist upsets in Europe led to outflows from European stocks leaving them at a discount to their US peers.

In this environment, active investors can uncover attractive opportunities. Politics and populism have dominated the agenda, skewing asset prices and markets. If France backed a centrist, pro-EU candidate, the threat would fade. Markets would focus again on longer-term trends: fundamental analysis and expert stock selection will return to the fore.

This favours our approach which applies a longer-term perspective – supported by our strong analytical resources – to identify companies with robust business models and sustainable competitive advantages.