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Independent centrist Emmanuel Macron has prevailed over the far-right Marine Le
Pen in the final round of the French presidential election. Macron’s comfortable win of
about 65% of the vote marked a rebuke of Le Pen’s Front National party, which ran on
a nationalistic platform that included a referendum on leaving the European Union.
We expect the focus to shift to French legislative elections in June. These will be
crucial for determining Macron’s ability to implement his economic program, which
includes labor market reforms that would make it easier for French businesses to hire
and fire. We see scope for a mild risk-on reaction to the result, which looks mostly
priced in after Macron clocked a first-round victory and polls consistently showed him
ahead by a large margin.
We are positive on European shares and see potential for renewed investor inflows as
focus returns to the region’s improving growth. European purchasing managers’
indexes point to the strongest economic activity in six years. Europe stands to benefit
from global reflation, and we see attractive valuations in cyclical shares. We are
underweight European fixed income. The region’s improving economic outlook may
spur higher bond yields and wider credit spreads – especially if markets sense the
European Central Bank (ECB) is moving toward winding back its asset purchases.
Macron will form an interim government for the short period until the new National
Assembly is in place in July. This government is not expected to make significant
policy decisions, but appointments will be a gauge of Macron’s ability to attract highprofile
names from the two major parties to form a broad-based majority.
Our base case is that Macron will need to select a compromise prime minister and
cobble together a working majority with supportive members of France’s two major
parties. This could lead to some watering down of his reform plans. Yet Macron’s
comfortable win means we now see some chance his En Marche! movement and its
formal allies could win an outright majority, enabling him to choose his prime minister
and government. A lower-probability scenario we see is the Les Républicains conservative party winning a majority. The last two scenarios would allow for business-friendly reforms – and would be welcomed by markets, we believe.
The French election result confirms our view that markets until recently had
overstated European political risks. Italian political risk and the country’s fragile
banking system could move back into focus soon, however, particularly if the
likelihood of early elections in late 2017 rises. These issues as well as Europe’s still
incomplete banking and fiscal union leave fault lines that could be exposed by
eventual ECB normalization – and which bring into question the longer-term
sustainability of the European Monetary Union.
Macron’s win marks a sea change in French politics. He is not part of the mainstream
left/right parties that have dominated since Charles de Gaulle formed the Fifth
Republic nearly 60 years ago. Macron, a 39-year-old former investment banker, ran
on a “change” platform that would favor business-friendly reforms and deeper
European integration. He is committed to meeting the EU’s 3% deficit target,
combining spending cuts with targeted investments and freeing up the labor market.
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