The French electorate has spoken. The result of the 1st round of the French presidential election has reduced the risk of a French exit from the Eurozone. Expectations for the endorsements of the eliminated candidates create a real sense of market optimism leading up to the second round of the election on Sunday, May 7th. La Française will gradually be able to return to portfolio management that is more in line with our economic forecast and base-case scenario.
Tight results of the 1st round of the election…
We were expecting scores that narrowly divided the four leading candidates in the 1st round, and the election results were relatively in line with recent polling. The 2nd round will be composed of the far-right Marine Le Pen and the centrist Emmanuel Macron. In light of the ongoing endorsements from the French political establishment, we have more and more visibility for the 2nd round. The main stakes for the President-elect will be to win a strong majority in French parliamentary elections in June 2017. Until then, there may be continuing fluctuations in financial markets to which we will continue to be attentive.
… do not fundamentally change the general environment for the 2nd round of the election
Trading last week saw French equities indices realize higher returns than their European counterparts. The spread in the government bond market between 10-year German and French interest rates (Bund/OAT Spread) has tightened anew. Furthermore, French and peripheral country bonds should continue to gain from reduced political uncertainty.
Against this backdrop, we will return to portfolio positioning in line with the improving economic trends seen since the beginning of the year
At the beginning of the 2nd quarter of 2017, economic indicators are showing positive signs. Corporate earnings releases are in line with or above analyst expectations. Medium-term trends are also promising. Barring an unpredictable event, and assuming the election of Emmanuel Macron, a pro-European candidate, markets should give him a relatively warm reception.
We are now choosing to adopt a more optimistic stance in the short-term insofar as the major fears have evaporated. Our investment strategy is largely guided by economic fundamentals and less marked by political risk in France.