Macron new French president : managers react

Emmanuel Macron has been elected French president on 7 May 2017. The candidate from En Marche! and former minister of Economy under François Hollande’s presidency, has gathered 66.06% of the second round’s votes while far-right Front National’s rival Marine Le Pen scored 33.94%.

The abstention rate has hit a record of 25.38% for the second round of a French presidential election. As Amundi’s global head of Research, Strategy and Analysis Philippe Ithurbide observed, with abstention, blank and null votes, more than one out of three French did not choose between Macron and Le Pen.

Macron’s win is a temporary relief for markets but new issues are soon expected.

Amundi: Macron could win absolute majority at French assembly

Amundi’s Ithurbide said Macron’s choice for the job of French Prime Minister will be crucial as he/she will lead the preparations for the parliamentary elections and start to gather voters out of Macron’s current base.

He quote an an OpinionWay poll – SLPV analytics made for the newspaper “Les Echos – that finds out En Marche could win majority within the French Assembly through a total of 249 to 286 deputies over 535 positions covered by the survey.

“The Republicans right would obtain between 200 and 210 seats, the National Front of Marine Le Pen would obtain only 15 to 25 seats (consequences of the transfers of votes and the “vitality” of the republican front). The leftist Socialist Party (between 28 and 43 seats) and the radical left of Jean-Luc Mélenchon (between 6 and 8 seats) would be the other great losers of these elections. As for the Socialist Party, it would be the worst result of its history. This would also be the end of the left-right bipartition of the National Assembly,” Ithurbide commented.

Amundi’s global head of Research said that in theory, Macron’s programme has been designed for “both left and right” as opposed to programs that claim “neither right nor left” and is likely to federate supporters of all parties, outside the far-right.

“If this proves to be correct, the probability that the movement “En Marche! obtains the absolute majority is therefore significant. If this were not to be the case, in addition to the rallying to the President, we would certainly see coalitions.

“Examination of the polls shows that the number of MPs missing to ensure the absolute majority should be limited, which will facilitate the task of the new President. A government can thus be formed, even if this new “cohabitation” formula will have to be managed, at worst, on a case-by-case basis. This could complicate the task of the President and his Prime Minister,” Ithurbide said.

T.Rowe Price: stability for now

Kenneth Orchard, global fixed income portfolio manager at T.Rowe Price, said Macron’s victory signals stability for now.

“French 10-year bonds were trading up to 50 basis points over German 10-year bonds recently, but we expect spreads to tighten moderately from those levels closer to last year’s average levels. After that, with France ‘out of the picture’ as a political risk, the markets will begin to focus on other issues,” noted Orchard.

T.Rowe Price’s fund manager recalled that as the new French president being a fervent supporter of the European Union, Macron’s relationship with German chancellor Angela Merkel is expected to work well.

As a result, the UK could face tougher Brexit negotiations if the German-French couple strengthens.

Said Orchard, the Italian election is not the only risk looming, an upheaval in Spain remains possible if Catalonia presses ahead with its proposed independence referendum.

“As things stand, the anti-EU Five Star Movement is on course to become the biggest party in Italy’s next election, which will take place either later this year or early next year. Macron’s victory may provide some much-needed support for pro-European parties in Italy – however, it is difficult to say what impact this will have on voter behaviour.”

AXA IM: three scenarios are possible

Laurence Boone, head of Research & Investment Strategy at AXA IM, highlighted Macron’s result was significantly higher than expected, unveiling a momentum rather in favour of an En Marche ! led coalition or even an outright majority for Macron’s new party.

“With that in mind, it might be wise to conclude that the result represents more a rejection of Le Pen’s brand of nationalism than a whole-hearted endorsement of Macron’s internationalism,” she warned however.

Boone outlined three scenarios :

  1. En Marche ! wins the majority, benefiting from the momentum from the Presidential election 2nd round, and can implement E Macron’s political programme. The more socialists and LR candidates that decide to run under the En Marche ! banner, the likelier the majority, which we should be able to observe over the coming days and weeks;
  2. En Marche ! gets a relative majority and has to lead a coalition government, either with the conservative LR or the socialist party, but retaining most of his reform and European agenda;
  3. The conservative LR wins a relative majority, implying a conservative PM, most likely in a coalition with En Marche !  

Boone said Macron’s win was priced in by markets, reflected in the euro appreciation in recent weeks, tightening of spreads (especially OAT), euro stocks up (especially French firms).

“As markets had to a large extent priced in Macron’s victory, we expect a rally of moderate magnitude in the coming days.

“Next, markets will likely come back to the uncertainty of US tax reform and financial deregulation, the US cycle and the Federal Reverse’s response in terms of monetary tightening, as well as European Central Bank next moves as the euro zone economy continues to recover more briskly (although we do not expect less quantitative easing or rate hikes before 2018),” she commented.

Boone added that the large gap between the two contenders argues for Macron to be able to implement most of his programme with a stronger parliamentary support than expected.

The European part of Macron’s programme will only show up after German elections, she bet, adding that his victory will undoubtedly support more momentum for European integration.

M&G Investments: facts remain key

Steven Andrew, macro fund manager at M&G Investments, said that from an investment standpoint, focusing on the facts remains key.

“The economic backdrop in France has improved significantly in recent years, as indeed it has across the euro region. This has been apparent not only in rising growth and falling unemployment rates but also, more recently, in significant upside surprises to market expectations for company earnings and sales during the opening period of 2017.

“This suggests that Euro Area equities, currently attractively priced, could deliver substantial investment returns in the period ahead. A disruption to the ‘euro-fragmentation’ narrative should encourage investors to focus more on improving fundamental data across the region. On the fixed income side, the debt of peripheral sovereigns such as Portugal should benefit from a reduced fear of political instability,” Andrew commented.

Fidelity: Macron’s win could be a 10% boost for French firms’ earnings

According to Vincent Durel, portfolio manager, European equities at Fidelity, as Macron is a centrist, pro-European reformist, who aims to reduce public deficits and boost economic growth, his election should ease global concerns about political risks in Europe, strengthen France’s credit rating and improve its economic outlook.

“French company earnings could receive a 10% boost from Macron’s economic measures, which include new tax cuts and a plan to convert the current temporary reductions in social taxes into permanently lower rates.

“Macron also intends to raise investment  by 50 billion euro over five years, which would benefit the energy, construction and IT sectors.

“In addition, the telecom sector could see renewed consolidation if Macron, as announced during his campaign, does indeed decide to reduce (or sell completely) the state’s stake in Orange,” said Durel.

Franklin Templeton Investments: Crucial labour reforms for France

Philippe Brugere-Trelat, executive vice president and portfolio manager at Franklin Templeton Investments, said coming labour reforms in France are very important and could prove positive not just for the French economy and the French equity market, but also for Europe in general.

“In our eyes, the chaotic French labour market in particular is ripe for reform. Unemployment is at unacceptably high levels, partly due to the strict employment rules that make it difficult for businesses to shed staff. As a result, businesses are reluctant to take on new employees.

“In order to implement labour reforms, Macron is going to have to take on the French unions and reduce their political power, which is immense and which has been accumulated over decades of French political infighting,” Brugere-Trelat explained.

FTI’s portfolio manager said some stiff resistance from unions against these reforms is expected, including some very noisy and visible national strikes.

“But we’d consider that to be a necessary step for the French economy. And if Macron is able to achieve some success with labour reform, I think we could see operating margins in France rising higher, unemployment going lower and the overall prospects for gross domestic product (GDP) growth improving.”

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is deputy editor and French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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