Chances of Euro sceptic French president up to 25%
Four days ahead of the French presidential election’s first round, polls suggest close results – 18% to 24% – between the top four candidates, Marine Le Pen (far-right), Emmanuel Macron, François Fillon (right-wing), Jean-Luc Mélenchon (far-left) – casting uncertainty on the names of the two candidates who will qualify for the second round.
Paris-headquartered asset management group La Française has assessed chances that a Euro sceptic candidate will win the French presidential election now amount to 25% while market operators see around a 20% probability.
However according to the manager, chances are low that a Euro sceptic candidate winning the election would drive France out of the eurozone.
“The impact of a pro-Frexit president is hard to evaluate but seems highly likely to trigger a major period of stress across all European markets. Our scenario has the spread between French and German government debt increasing from 65 basis points to 200 basis points, equity markets falling sharply and a slump in the euro,” La Française argued.
The company added that the question around an eventual “France risk” in portfolios remains how to limit the scale of any negative impact on the portfolios, while retaining an appropriate asset allocation if the risk fails to materialise.
“The answer will obviously vary from portfolio to portfolio, but in most cases we recommend partial protection of risky assets. In fact, since we see current market levels as rather expensive and with little sign of the political risk being priced in (low volatility, low level of hedging, etc.), the risk seems to us asymmetrical to the disadvantage of the investor. This does not mean we believe a euro sceptic will come to power on the second round but merely that today’s markets are not paying us enough to run this extreme risk without taking precautions,” explained La Française.
“Our risk is now concentrated on equities, preferably European, emerging assets (equities and fixed-income) and our bond components remain low in duration on government bonds, although this bias has been reduced since last month,” it said.