Observations on the French Election

Overview

Emmanuel Macron and Marine Le Pen have won the first round of voting in the French presidential election and will face each other in the final round on May 7. The result is essentially a consensus outcome as Macron and Le Pen have led in the polls since February.

The election gained more attention among market participants in recent weeks as polling tightened. As noted in our 2017 Investment Outlook, the rise of populist figures on both the left- and right-end of the European political spectrum have added to concerns about the cohesiveness of the European Union and the euro currency union. Le Pen, a far right candidate, has campaigned against France’s membership in the European Union and the euro currency union.

We now expect the market to focus on a presidential debate scheduled for May 3 and poll results heading into the final voting round on May 7.

Outlook

Markets had adopted a cautious tone as polling tightened ahead of the first-round voting. Looking ahead, we think:

Markets are likely to take comfort in the result. We think market participants were primarily concerned about two possible scenarios: 1) a significant win by Le Pen or 2) a run-off between Le Pen and far-left candidate Jean-Luc Mélenchon in the second round. Neither scenario materialized.
Market re-pricing is likely to be moderate. We believe the risk premium priced by markets related to the French election has been limited, and therefore expect only a moderate re-pricing in markets. We expect support for the euro and French government bonds. We also expect a positive impact on European stocks. However, European stocks have performed well in recent months (the Euro Stoxx 50 Index is up 4.6% year-to-date) as improvements in European economic data appear to have overshadowed political concerns.
Centrist candidate Macron is likely to become France’s next president. In our view, the first-round voting results suggest that momentum favors Macron over Le Pen in the final round. Opinion polls also favor Macron versus Le Pen in the final round. Although opinion polls have come under scrutiny following surprises in the US and UK, France’s first-round results appear very consistent with polling ahead of the vote.
Political risk in Europe is likely to recede as a market concern. Should Macron win, we expect French policy to remain broadly consistent with existing policy as Macron formerly served as the Economy Minister for current French President Francois Hollande. In that case, both the Dutch and French elections will have passed without disrupting the status quo in Europe.