The French presidential election and what it means for markets

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Investing

Gareth Trainor

5th May 2017 at 10:58am

As we’ve seen over the last year with Brexit and the election of Donald Trump as US President, financial markets can be very sensitive to political events. So currently all eyes are on the fascinating French election and the two very different candidates through to round two. With the Strategy Team from Standard Life Investments, we consider what a win for the two remaining candidates could mean for markets and investments.

On one side there’s the centrist European Union (EU) supporter Emmanuel Macron, on the other the far-right Europhobic Marine Le Pen. The first round of the election suggests that Emmanuel Macron is favourite to win the second and final round of voting on 7 May, and markets so far have reacted positively to this. But a week in politics is a long time…

Whoever wins faces a challenging situation

France is currently facing a range of structural and socioeconomic issues that will need urgent attention from whichever candidate goes on to become president. These issues are the very reason why 45% of the French electorate supported candidates with more extremist policies, albeit from different sides of the political spectrum.

France is currently facing a range of structural and socioeconomic issues that will need urgent attention from whichever candidate goes on to become president.

Even if current favourite Macron does win – it won’t be plain sailing. Although the uncertainty around France leaving the EU will recede, along with France’s internal issues there are significant challenges facing the broader EU which, as French President he’ll have to get heavily involved in. These include accelerating structural reforms, ensuring Eurozone institutions function more effectively and Brexit negotiations.

One thing’s for sure though – whoever succeeds as the next President will have to share power with the National Assembly (the lower house of the French parliament). The course that relationship takes will be fundamental to the direction of major policy decisions, and how markets and investors will react to these decisions.

Potential impact on markets of the two possible outcomes – based on the views of Standard Life Investments

If Emmanuel Macron is elected

 

If Marine Le Pen is elected

 

· Positive for European equities (shares)

· Negative for German government bonds (bunds)

 

· Negative for European equities (shares)

· Positive for German government bonds (bunds)

 

Standard Life Investments expects a win by Macron will cause European bonds to decline and equities to rally as the prospect of a French exit, or ‘Frexit’, from the EU recedes. They also highlight the benefits of a Macron victory for the economy. If Macron can form a majority consensus, his economic policy platform would deliver much-needed structural reforms to France’s beleaguered economy, particularly in the key areas of labour market reform and competitiveness. Standard Life Investments sees a win by Marine Le Pen as increasing the chances of Frexit and economically damaging protectionist trade policies. They see this as increasing the attraction of safe haven investments such as German bunds and decreasing the attraction of riskier assets such as equities.

 

It’s clear there’s a wide range of potential political, economic and market outcomes for investors to consider, and not just in France. We’re going through a period of political upheaval around the globe.

We’re going through a period of political upheaval around the globe.

With this in mind, it’s a reminder to us all to make sure we’re not exposed to the movements of a single market or region. It’s worth checking that you have a diversified mix of investments.

We’ll keep you updated on the latest views from the investment strategists at Standard Life Investments on what’s happening. Also look out for the monthly market reviews from Andrew Milligan, Head of Global Strategy.

The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in April 2017. Please remember that the value of your investments can go up or down, and may be worth less than you paid in.