Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


French elections: Macron's lead soothes market nerves

Jocelyn Jovene  |  14 Apr 2022Text size  Decrease  Increase  |  
Email to Friend

In a repeat of 2017, the race for French presidency will see a battle between centrist President Emmanuel Macron and far-right rival Marine Le Pen in the final round on April 24.

Macron attained 27.6% of votes while his opponent received 23.4%, the official results of round one show.

“The first round confirmed the collapse of traditional parties and rise of the protest vote. A new campaign will begin, with a focus on the economy and foreign policy. The outcome remains highly uncertain, although Macron keeps a small lead”, writes Barclays economist Philippe Gudin in a note to investors.

The battle for the final round will be fierce.

From almost certain at the beginning of March, the “large” victory of Emmanuel Macron (La République en Marche or LREM) in the first round of the presidential election, Sunday April 10, has transformed into a narrow lead.

While leading the European response to the war in Ukraine, the French President did not fully take the measure of the implications of the war on the economy, while his rival led her campaign on “protecting” income and purchasing power of French households but also tried to conceal her sympathies for the Russia President.

Macron’s "assurance" of re-election is all the more complicated as the turnout has been historically low.

Market shifts

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Earlier last week, financial markets began to take note of this shift in the electorate and the chances of victory for either side.

Since the beginning of the year, the CAC 40 index, a benchmark French stock market, has fallen by 6.6%, but this drop is primarily explained by a 10% contraction in the valuation multiple of shares (P/E 12 months forward).

The spread between the French sovereign bond and the Bund has risen recently, to 56 basis points last Friday compared with 20 basis points at the end of last year.

“The re-election of Macron would be a positive element for the cohesion of the European Union. On the domestic front, the continuation of labor market reforms, the rise in the retirement age and corporate tax cuts would lift medium growth prospects”, wrote Jean-Baptiste Pethe, economist at BNP Paribas Exane, in a note dated April 1.

“Should a populist be elected, sovereign risk in the Eurozone would likely jump”, adds the economist, who expects 100 and 150 basis points rise in the sovereign spread in the event of victory for Ms. Le Pen or Mr. Mélenchon, respectively.

“In the case Le Pen wins, we recommend underweighting French banks in priority, staying defensive and selectively choosing some names in the consumer space”, says Exane.

Goldman Sachs strategists also point to the European implications of the French election.

In a note dated April 8, they said: “Since the invasion of Ukraine by Russian forces, equities and sovereign spreads have been resilient (…) Part of this resilience likely lies in the swift and homogeneous response of European leaders (…) with President Macron being a key player in proposals for further EU integration.”

"A change in the French presidency or rising odds of a Le Pen victory is likely to trigger market stress, pushing some sovereign risk back to the forefront and raising the equity risk premium”, they add.

Sean Darby, strategist at Jefferies, points out a number of French-listed companies have attractive fundamentals and valuation multiples in terms of return on capital and free cash-flow yield), particularly in a context of rising interest rates.

However, he maintains a “moderately positive”/“modestly bullish” view on French equities within an overall allocation.

is Senior Financial Analyst and Senior Editor for Morningstar France.

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend