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French election: Sigh of relief for markets as Frexit fears allayed

Glenn Freeman  |  09 May 2017Text size  Decrease  Increase  |  

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Markets heave a sigh of relief as Emmanuel Macron's election lays to rest fears of a French exit from the European Union--and a potential knock-on dissolution effect--but investors should avoid snap investment decisions.


The independent French centrist secured 66 per cent of the vote, against far-right candidate Marine Le Pen's 34 per cent. In general, Morningstar believes Macron's presidency will be a positive development for France's economy and businesses.

"By resisting protectionist impulses and providing necessary reforms for France's labour market, Macron's government has an opportunity to make French companies more competitive in a global marketplace, which should lead to improved long-term returns," said a statement issued by Morningstar.

"We will be reviewing our stock ratings as more details emerge regarding reforms, but at this point we don't anticipate making wholesale changes to the more than 1,600 companies in our coverage universe.

"Along the same lines, we are not making any changes to the ratings of funds that receive our Morningstar Analyst Rating for funds. These ratings are qualitative assessments of funds' expected long-term performance relative to their respective peer groups."

Morningstar's fundamentals-based views on investment merit remain unchanged by the French election result, "and we recommend that, like stock investors, fund investors avoid making knee-jerk decisions and consider their investments in the context of their long-term objectives and risk tolerance".

"As always, Morningstar will remain vigilant on the more than 3000 analyst-rated funds on which we provide coverage, and any significant changes in their intrinsic quality due to this or any other event would be promptly reflected in our ratings," according to the statement.

Removing European blinkers on international investing

Global markets appear to have already priced in the result of a Macron victory, according to the broadly-held view among fund managers.

"It was a widely-expected outcome, so the market reaction is more to do with the better payroll figures that came out of the US on Friday, as well as a bounce in commodities prices, rather than the outcome of the French election," says Kerry Craig, global market strategist, JP Morgan Asset Management.

He believes the challenge now presented to Macron and his En Marche! party becomes about "the new president's ability to unify the country ... about the composition of the new government and its ability to drive the very liberal changes Marcon's talked about, including legislative reform in employment and to keep the deficit in check".

For individual investors in Australia, he believes the election re-opens expectations about international investing, beyond simply the United States.

"I think this will again cement the idea that when Australian investors think about international equities, they don't just think about the US ... it's starting to broaden out the horizons again."

Good news, but ...

Others echo the above views about markets feeling some relief on the political front, but the need to now transform rhetoric into action.

"With Emmanuel Macron's widely expected victory now confirmed, markets can relax about European politics for at least a few weeks," said Timothy Graf, head of macro strategy EMEA, State Street Global Markets.

"It is supportive short-term news for risky assets and the euro, but given Macron's consistent lead in second-round polls throughout the campaign, gains in each are likely to be more muted than those seen two weeks ago."

His colleague from State Street Global Advisors, Bill Street, head of investments for Europe, Middle East and Africa, also believes the election result will "be enough to support a short-term relief rally".

"In a do-nothing scenario, we have the status quo of political paralysis, but with a favourable external environment and steady growth improvement," Street says.

"In the goldilocks scenario, Macron gets a working parliament and builds a partnership with Germany to launch meaningful reforms. That would deliver a substantial boost to markets by year-end, which is currently not priced in."

Similar views were voiced by Raman Srivastava, deputy global chief investment officer at Standish Mellon Asset Management, part of BNY Mellon Investment Management.

"We expect a similar relief rally after today's result but to a lesser extent given how heavily markets had priced in a Macron victory. We think spreads in peripheral government bonds will likely tighten somewhat as will corporate credit generally," he said.

"We also believe the euro will do well. Again, we expect bunds to sell off as the election-led migration to safety unwinds somewhat."

Srivastava sees further political risk ahead for the Eurozone, most notably in Germany but also Italy.

"Nevertheless, we view the former as relatively benign regardless of outcome. Italy holds more potential for an upset but we note the election will not likely occur in 2017," he said.

"The French election was one of the big risks for Europe, and with the prospect of Le Pen as president now off the table, we would argue that the relatively stable political environment makes it a good time for the ECB to begin considering tapering."

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Glenn Freeman is a Morningstar senior editor.

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