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Unlike the surveys ahead of the UK referendum and the U.S. elections, French election
polls seemed to be more reliable. The chances of Le Pen winning the presidency seem to
be very slim and not within margins of error. The medium-term risk of a Frexit has
substantially subsided. Yet, the clear lead of Macron (expected to win by 59 to 64%) cannot
overshadow the powerful anti-establishment call also expressed in the vote. The leeway to
lead reforms in France will be tested during the June general elections. Neither candidate
comes from a mainstream party, it is not clear that they would obtain a governing majority.
Unsurprisingly, global risk assets surged. The Euro settled at around +1.5%, Euro-banks
surged +8%, the French OAT vs. Bund 10Y spread shrunk by 15 bps, and gold lost about –
1%.
All strategies were up last week. Hedge funds captured the upside which was a function of
the protections implemented ahead of the French vote. Special Situations outperformed, as
their cyclical and turnaround positions surged. CTAs’ strong long equity exposure offset
losses in their short Euro and in their long Euro bonds. By contrast, hedges and relative
positioning in Global Macro and L/S Equity funds capped the upside.
Markets and hedge funds were also supported by an upbeat earning season. In Europe,
the fading political risk benefitted most reporting companies, with less regards to their
fundamentals. Stocks rose across the board, however, alpha generation was modest. We
expect the stock-picking environment to improve as investors refocus on companies’
fundamentals and on the European recovery.
In the U.S., in-line earning announcements no longer suffice to translate into meaningful
stock performance. Expensive valuations and high Q1 earnings expectations are spurring
more acute fundamental discrimination. In contrast with Europe, fund managers make do
with more modest market contribution, but they benefit from better alpha prospects. This
should support neutral U.S. funds and longer bias L/S Equity funds in Europe.
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