French elections: Macron's lead soothes market nerves

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

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.