French Presidential Elections

21 April, 2017

Every five years, the electorate of France go to the polls to vote for a new President. Campaigning for the 2017 election has been intense, and given the upsets seen both in the UK last summer with Brexit and the US electing a celebrity TV personality in the shape of Donald Trump to be its President, there is certainly a feeling that anything can happen.

It is however worth bearing in mind that since the start of the year, continental Europe does seem to be pulling together. The far right failed to make a meaningful impact on the Dutch parliamentary elections, whilst the elections in the German province of Saarland last month leant support to Angela Merkel, suggesting that despite all the hype, now is not the time for political revolution.

Timetable/How it works

The election is run as a two stage process, the first round of which takes place on April 23rd. Although this is a costly electoral process, it does have the benefit of delivering an absolute majority, whilst also avoiding the risk of wasted votes.

There will be a total of eleven names on the first ballot paper. In the event that one of these candidates receives over 50% of the votes, the contest is over and they will be declared the next President. However this isn’t seen as likely so instead, the two candidates who poll the most votes will enter a so-called run-off vote on May 7th.

The five main candidates and what they each stand for

Emmanuel Macron. Currently the front runner in opinion polls and has been a strong performer in televised debates. Macron has said that the Euro is destined for failure in a decade without reform, but he remains a proponent of the common currency. He also wants to see a two-speed European Union, which again would arguably strengthen both the trading bloc and its currency. He may be a rookie politician but his fresh ideas do seem to have an appeal

Marine Le Pen. Daughter of the founder of France’s National Front party, Ms Le Pen has been working hard to drag the party to a more centrist position to broaden its appeal. She is currently standing second in the opinion polls and sees the Euro as a barrier to the success of the French economy, with the currency catering to the needs of Germany. She wants France to leave the EU and some bankers have said that her high ratings are dragging down European equity valuations.

François Fillon. A former French Prime Minister. He has been embroiled in a fake jobs scandal and this has served to drag down his poll ratings, but he remains a strong contender.Ð’Ð’Ð’  Mr Fillon is demanding an end to the open borders of Schengen, citing high French unemployment as a reason to draw a line under the project. He says that both the French government and the European Union need to see reform.

Jean-Luc Mélenchon. Backed by the communist party, the hard-left candidate has suggested France should leave the European Union and he wants to drive a massive, €100 billion stimulus program with a series of nationalisations. A 100% income tax on those earning over €360,000 per annum has also been proposed, but if this all sounds rather far fetched, it’s worth remembering that he came fourth in the 2012 election.

Benoît Hamon. A socialist and one who was seemingly selected in a bid to stop the party disappearing into obscurity. His campaign has revolved around such points as a tax on robots, a reduction in the already short working week and a universal basic income. Centre-left supporters are however seen to be aligning themselves with the front-runner Macron, pushing Hamon into the political hinterland.

What’s likely to happen?

The expectation is that this will be a close run race. A high voter turn out on Sunday will have the potential to leave Macron and Le Pen going into the run off and the assumption from there would be that a sufficient number of voters would refuse to back the National Front, in turn handing victory to the newly formed centrist party.

However, there are some commentators who still believe that the run-off will be between Le Pen and Fillon, presenting a more protectionist France whatever the outcome of the May 7thÐ’Ð’Ð’ ballot. This seems even more likely if voter turnout is low. The first indications of engagement will be available on Sunday April 23rdÐ’Ð’Ð’ at 10am GMT.

Assets to watch

European equity indices have been held back by the uncertainty over the campaign, with JP Morgan explicitly stating that significant inflows will be seen if Le Pen loses. This chart shows how the CAC has been lagging the FTSE-100 and the Dow Jones over the last 12 months.

An early exit for Le Pen would have the potential to give the CAC a meaningful boost, with read-across likely to drag the DAX higher too.

EUR/USD has found some gains from the start of the year when the dominant risk was populism being the catalyst for the collapse of the entire European Union project. Upside is still limited, but against a backdrop of rising US interest rates and stagnant Eurozone inflation, there is meaningful strength here. Analysts at HSBC have crunched the numbers, using what they learnt from the pound’s performance over Brexit. If she is knocked out of the race, the belief is that the pair will rise to 1.13. In the event she wins, the bank expects a drop through parity down to 0.93.

EUR/GBP with the Pound offering international investors proxy exposure to Europe, the currency could find support off the back of the election outcome as all the front runners seem intent on effecting some kind of reform in Brussels. However, a strong opinion over Brexit could prove just as unsettling for the pound, meaning long term trends may be difficult to call.

EUR/CHF is another pair that could see even more protracted volatility in the event of a shock win for Le Pen or – less likely - one of the left wing candidates. Not only will the Euro be vulnerable, but the safe haven quality of the Swiss Franc will likely exaggerate inflows.

European bond yields are set to be impacted if the winning candidate looks likely to disrupt the status quo of Europe. This is again going to be more pointed in the event that we end up with a Le Pen/Fillon run-off. A suitable pairs trade may be to buy the German 10 year bond and simultaneously sell the Italian equivalent, looking to exploit the expected divergence in rates.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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