Market comment: Relief after French presidential elections

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French Elections

Emmanuel Macron and Marine Le Pen have won the first round of the French presidential elections on Sunday. Financial markets can relax for now and again focus on improving fundamentals. Initial market indications are pointing at a modest recovery in the euro and a slightly higher opening of European equity markets at the opening of markets this morning.

As it stands right now, the young centrist Macron won with 23.8% over far-right Le Pen who received 21.5% of the votes. Financial markets have been monitoring this round closely as it was a neck-and-neck race, with many undecided voters in the run up to the first round. On Sunday, 7 May, the second and final round will take place.

Annemijn Fokkelman, Global Head of Equity Strategy, says this outcome is favourable for markets and in line with our base-case scenario. “For financial markets, this round was already decisive and I expect markets to react relieved. Stock markets have been rising for several months, but were recently held back by geopolitical concerns, amongst which the elections in Europe, such as the French. The markets have some room to ease now, and to continue to pay attention to positive fundamentals.” For the next round, our base-case scenario is that Macron will be voted as the next French President. The outcome of the French parliamentary elections in June will be essential for Macron to gain parliamentary support for his programme.

Also for bonds, Chris Huys, Senior Fixed Income Portfolio Manager, expects market tensions to diminish. “With this outcome, the risk of France leaving the eurozone is off the table. Now that Macron is clearly favourite to win, we expect the 10-year French spread to fall back to around 50 basis points (bps) quickly and EUR/USD to receive a boost.” Before the elections, the spread moved from 50 bps early this year to a peak of 75 bps just before the elections. The higher spreads resulted from lower Bund yields, more than from higher French yields.

What should investors do?

Following the initial results last night, the Global Investment Committee concluded that economic fundamentals worldwide are improving and expects the positive momentum to stay. We continue to favour stocks, as bonds remain unattractive. We also advise a large reserve of cash ready to be deployed as opportunities arise.

We suggest investors to favour European equities over US equities. Compared to the US, the environment for European equities is rapidly improving: we see signs of rising European economic growth, much stronger upwards earnings revisions than in the US and increasingly attractive valuations. The elections in Europe continue to represent risks, but we see these risks abating.

As for bonds, we suggest investors to reduce the portfolio duration. As such, our strategy is to be positioned not only for higher global yields over the next 12 months, but also for the relief rally after the French elections that should push German Bund yields higher again.

We will monitor the markets closely and update you on Monday, 8 May, on the final result of the French presidential elections.


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