The two-horse race that the polls predicted - J.P. Morgan Asset Management

The two-horse race that the polls predicted

Contributor Vincent Juvyns

In brief

  • The 2017 French presidential election has been the most uncertain in the history of the Fifth Republic. But on this occasion, the opinion polls turned out to be right, with centrist Emmanuel Macron and Front National leader, Marine le Pen, both proceeding to the second round with 23.86% and 21.43% of the vote on the latest count.1
  • While this result was broadly expected, it is still historic: Les Republicains and the Socialist Party, which have dominated the French political landscape over the past decades, will be absent from the second round.
  • French voters are in a very different place than when Jean-Marie Le Pen reached the second round in 2002, and we can expect his daughter, Marine, to attract many more votes in the final stage than her father did. However, if current polling numbers continue to hold up, the assumption must be that the more market-friendly Macron will become the next President of France.
  • The spread between 10-year French and German bonds fell by 17 basis points after the markets opened and the euro/USD surged to 1.0839, its highest level in five months.2 Additionally, equity markets rallied on the news, with the Nikkei up 1.37% and Eurostoxx 50 up 3.83%. The banking sector seems to be benefitting the most (Eurostoxx banks: +6.6%) from the election outcome. 3

The importance of upcoming legislative elections

Most polls suggest that Macron would comfortably win over Le Pen (60.5% vs. 39.5%) in the second round and both the Republican François Fillon and the socialist leader Benoît Hamon have already endorsed Macron.3

The new President will take office on Sunday 14 May at the latest. If, as the polls suggest, Macron becomes president, he will face the challenge of forming a government and a coalition that can win the French legislative elections that will be held on 11 June and 18 to elect the 577 members of the National Assembly.

This will be crucial, as Macron does not have the backing of any political party and will therefore need to consolidate his diverse supporter base, which ranges from the former leader of the French communist party, Robert Hue, to Alain Madelin, a former minister under Jacques Chirac.

Investment implications

As of Monday 24 April, we expect markets to price in a Macron victory in the second round, as suggested by current polls, and the traditional “Front Républicain” to block the National Front candidate. Macron is seen by many investors and policy makers as pro-EU, moderately reformist and fiscally responsible, so it is not surprising to see a relief rally in equity, foreign exchange and fixed income markets in response to his strong first round showing.

The euro could continue to strengthen, if the European Central Bank (ECB) decides that political risks are diminishing, though it will not want to assume anything before seeing the result of the second round. While investors may see some market volatility until the final votes are counted, with purchasing managers’ indices at six-year highs, confidence indicators improving across the board, unemployment on a downward trend and earnings-per-share growth at 10% in the fourth quarter of 2016, we expect the focus to be on these positive economic fundamentals in Europe, when and if the political clouds over France begin to lift in the summer.

1France Interior Ministry. Latest results as of 24 April 2017, 08:00 CEST.

2Thomson Reuters Datastream. Data as of 24 April 2017, 09:30 CEST.

3IFOP, 19 April 2017.

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