Download An Investor`s View of the French Presidential Election

An Investor’s View of the French Presidential
Election
April 4, 2017
by David Zahn
of Franklin Templeton Investments
As far as most commentators are concerned, the first round of the French presidential elections, due
to take place on April 23, will be a race to see who faces the far-right National Front leader Marine Le
Pen in the run-off in May. Here, David Zahn, head of European Fixed Income, Franklin Templeton
Fixed Income Group, gives a brief assessment of how the bond market might react to the various
candidates.
Despite the failure of the anti-immigration, anti-European Union (EU) party to make significant in-roads
in the recent Dutch elections, we don’t think we can discount the influence of populism in upcoming
European elections completely.
As we noted in the aftermath of the Dutch election, there are many similarities between Marine Le
Pen’s National Front in France and Geert Wilders’ Party for Freedom (PVV) in the Netherlands.
However, on the back of Wilders’ loss in the Dutch elections (which markets broadly welcomed) we
believe investors should remain cautious of the sort of complacency that was prevalent around the
United Kingdom’s Brexit vote and the US presidential election.
Our base-case scenario is for Le Pen and the centrist-independent candidate Emmanuel Macron to
make it through the first round on April 23, and then face each other in the run-off on May 7. While we
aren’t in the business of making political predictions, we believe Macron will likely take the presidency.
While we recognize there is a possibility Le Pen could win in the second round of voting in May, we
think it’s a low one.
Even if Le Pen fails to capitalize on her polling strength, we foresee populism continuing to dominate
European political discourse for some years to come.
If Macron does indeed find himself facing Le Pen in the second round and emerges victorious, a rally
in French government bonds seems likely to us, at least in the short term.
Page 1, ©2017 Advisor Perspectives, Inc. All rights reserved.
Longer term, however, we think a Macron victory could be negative for the French bond markets
because at present his policies are unclear and seem set to do little to address two major economic
concerns: France’s high debt-to-gross domestic product (GDP) ratio and high current account deficit.
On the other hand, we’d expect a more immediate negative market reaction should Le Pen prove
victorious in the second-round voting.
Should Le Pen win, we anticipate a likely bear market in French government bonds. Le Pen has been
vocal about her plans to host a referendum on France’s EU membership. While it remains to be seen
whether she could achieve this, we would expect to see markets start to discount the probability of
France leaving, and this would likely lead to increased volatility in French bonds.
An even more remote possibility at this stage would appear to be a victory for the centre-right candidate
Francois Fillon, whose campaign has been beset by accusations of wrong-doing.
However, if Fillon were to succeed, this could potentially prove positive for French bonds. In our view,
Fillon is the only candidate to really tackle key issues in France’s economy. We’d consider him to be
the true reformer out of the three main candidates, pledging to shrink the size of the state and tackle
the debt and deficit issues head on.
One important point to consider is that a decisive victory for Le Pen in the first round of voting does not
necessary make her the favorite in the run-off. But equally, if she fails to secure the presidency, we
don’t expect this to spell the end of the influence either of Le Pen herself or the supporters of her
populist views.
The comments, opinions and analyses expressed herein are for informational purposes only and
should not be considered individual investment advice or recommendations to invest in any security
or to adopt any investment strategy. Because market and economic conditions are subject to rapid
change, comments, opinions and analyses are rendered as of the date of the posting and may
change without notice. The material is not intended as a complete analysis of every material fact
regarding any country, region, market, industry, investment or strategy.
This information is intended for US residents only.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
What Are the Risks?
All investments involve risks, including possible loss of principal. Bond prices generally move in the
opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise
in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special
risks including currency fluctuations, economic instability and political developments.
© Franklin Templeton Investments
Page 2, ©2017 Advisor Perspectives, Inc. All rights reserved.