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The race to become the next president of France is very close with polls suggesting four candidates are within touching distance of qualifying for the second round.

As we approach the first round of voting in the French presidential election, which takes place on Sunday 23 April, the race is getting closer with the latest polls suggesting four candidates are within reach of qualifying for the second round on 7 May. 

 

While Emmanuel Macron and Marine Le Pen remain neck and neck for first place, pollsters have warned that as many as 40% of voters have yet to decide who they will vote for.

This has raised the possibility of a scenario in which two Eurosceptic and non-mainstream candidates, far-right Le Pen and far-left Mélenchon, could face each other in the second round. The recent surge in Mélenchon’s popularity ratings coupled with a strong anti-establishment sentiment among French voters mean this scenario, although unlikely, cannot be ruled out. 

All eyes on June’s parliamentary election

Our view is that the June parliamentary election is as important as the presidential election given the nature of the French political system. This stage in the process sees the appointment of the French Prime Minister, voted in by representatives from 577 constituencies, and who is given responsibility for running the country’s domestic affairs.

The localised nature of these votes goes some way to explain why we believe it is unlikely that Le Pen or Mélenchon would achieve an outright majority to implement their political agenda should either become president.

Overall, and irrespective of the results of the presidential election, the French political landscape is expected to be more fragmented than ever.

 

Fundamentals strong for Europe

Against this backdrop, financial markets have started reflect a heightened level of uncertainty. For example, Eurostoxx volatility, a gauge which measures the expectations of volatility in Europe’s leading shares, has more than doubled since last month. In addition, the premium (or spread) France pays over Germany to borrow for 10 years has been rising to levels last seen earlier this year when the prospect of a Le Pen victory was higher.

However, other areas of the market have been more resilient. French banks, for example, have only slightly underperformed since the beginning of April in an overall benign environment for European assets.

 

What does this mean for investors?

In the run up to the first round of elections, we expect to see some volatility in French asset prices and an increase in hedging activity. Depending on which two candidates succeed in the first round, we may see a range of market reactions from a stock market rally through to a sharp price adjustment.  

At Coutts we are very focused on the longer term picture, with fundamental analysis and valuations forming key drivers of our investment decisions. In our view, European equities look attractive at current levels, particularly compared to US equities, and should continue to benefit from the ongoing recovery in the eurozone illustrated by stronger GDP growth and positive revisions to earnings. The latest data from Germany, France and Italy continue to point at a robust rise in industrial production supported by healthy global demand and a weaker euro exchange rate. A positive outcome in the French elections could therefore act as a catalyst and support foreign investors to move back into European stocks as the political risk premium attached to European stocks falters.

  • We do not believe politics is a long-term driver of investment returns. Large economies are like supertankers whose direction does not change easily. We see economic growth being driven by factors like the growth of the labour force, education, technological change and global economic developments. Likewise, we believe stock returns are driven by long-run economic and financial factors. This does not necessarily mean we are in for a smooth ride. Markets often react to political events and create short term noise. If volatility were to increase, Coutts would be looking to take advantage of attractively priced opportunities if they align with our core investment principles such as seeking hidden value in investments and diversification within portfolios.

  • Ultimately we can not be sure, but history tells us that during periods of political change there is no discernible long term impact on the health of major economies. We believe the fundamentals in Europe remain robust and Coutts continues to have conviction in European equities. We see valuations as favourable compared to other developed markets and the outlook for earnings growth attractive.

  • We recently asked a range of our clients on their views and by far the majority expected the EU to still be intact in five years time. The outcome is incredibly difficult to predict but whatever the result, Coutts believes that focusing on our core investment principles, centred on a well diversified portfolio of assets and being patient, will serve investors well over the long term.

  • Elections timeline:

    21 April: Poll blackout period begins

    23 April: First round. Exit polls at 7pm BST

    7 May: Second round between the two finalists. Exit polls at 7pm BST

    11 and 18 June: First and second rounds of parliamentary elections to renew 577 seats in the lower house

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