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France says 'oui' to Macron: what it means for equities and bonds

France says 'oui' to Macron: what it means for equities and bonds

Emmanuel Macron's victory over Marine Le Pen in the French presidential election has not cleared markets of political risk, fund managers have warned.

While the victory for the independent centrist was met positively by markets, what are the longer-term implications for the former investment banker taking the hot seat?

Citywire Selector has collated the views of top equity, bond and multi-asset investors to see what it means for their respective asset classes.

Equities

Citywire + rated Philippe Brugère-Trélat, who manages the Franklin Mutual European fund, said, while the markets had priced in Macron’s victory, there is still political risk.

Macron has little political experience and the upcoming parliamentary elections will have a big influence on whether Macron can keep his election promises, the fund manager said.  

'At the outset of the presidential elections, there were four candidates representing very different parts of the political spectrum who accounted for around 20% of the votes each. We’d expect that split to be reflected in the composition of the new French assembly.’

He added that France had lagged behind its neighbors in terms of economic reform. If Macron manages to push through his reforms, the French equity market would improve and see GDP rise.

'In our eyes, the chaotic French labor market in particular is ripe for reform. Unemployment is at unacceptably high levels, partly due to the strict employment rules that make it difficult for businesses to shed staff. As a result, businesses are reluctant to take on new employees,' he said.

‘In order to implement labor reforms, Macron is going to have to take on the French unions and reduce their political power, which is immense and which has been accumulated over decades of French political infighting.’

Fixed income

Gilles Pradère, who manages the RAM (Lux) TF Global Bond Total Return fund, said the result was positive for European markets but was also cautious of how parliamentary elections would play out.

‘It is too early to tell what the results will be, but some polls show a majority for pro-reform for France and a pro-Europe government likely, such as Macron supporters and republican right given as the two leading groups.'

Pradère echoed the view that political risk in Europe is not yet over and it may be that Macron’s reforms are only strengthened in the autumn.

'As Germans in September are also likely to elect a pro-European government, the two leading countries in Europe will have a clear opportunity to do significant reforms to improve its functioning, at a time of economic recovery,’ Pradère said.

'A strong political will in both France and Germany combined with a decent economic landscape has not been seen in Europe for a while.'

Multi-asset 

Citywire A-rated Steven Andrew, who manages the M&G Income Allocation fund, said Macron’s victory was a rejection of Le Pen’s brand of nationalism rather than a full endorsement of Macron’s internationalism.

'A strong believer in free trade and globalization, the new French president will aim to benefit from those trends rather than fight to reverse them. 

'This makes his victory all the more impressive, given that popular discontent has been interpreted as a rejection of both closer EU integration and of the merits of globalization,’ he said.

‘His victory however is more about what has been rejected than it is about any distinct shift in the direction of French politics. Certainly, Macron has disrupted the bipartite status quo, with the adoption of a [former UK Prime Minster Tonu Blair] Blairite ‘Third Way’ style – at least in presentation.'

Andrew added the economic environment in France had improved significantly, with company earnings and sales exceeding expectations in 2017.

‘This suggests that euro area equities, currently attractively priced, could deliver substantial investment returns in the period ahead,' Andrew said.

'A disruption to the ‘euro-fragmentation’ narrative should encourage investors to focus more on improving fundamental data across the region. On the fixed income side, the debt of peripheral sovereigns such as Portugal should benefit from a reduced fear of political instability.'

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