French election outcome as expected

By: • May 8, 2017 • Market Commentaries

In the second and final round of French elections, Emmanuel Macron, leader of the En Marche! movement in France received 66% of the vote, defeating National Front leader Marine Le Pen. This outcome was largely expected and was in line with what polls were suggesting. Macron will take office on May 14.

Macron’s victory helps ease fears over rising populism as Macron favours deeper eurozone integration (while Le Pen has a more protectionist and populist economic agenda) and removes a key overhang on European equities. Additionally, Macron also campaigned under a platform of reforms that if implemented would increase the competitiveness of French companies. Key elements of his platform include:

  • Labour reforms - Market deregulation in the form of a decentralized wage bargaining process at the firm level, implementing a cap on firm’s severance payments and making it easier to lay off workers. Macron argues that these reforms would reduce the unemployment rate to 7% over the course of his presidency;
  • Lower taxes – Lowering corporate taxes to 25% from 33.3%, and also lowering the tax burden on households;
  • Lower public spending - Reducing structural public spending by 60 billion to 52% of GDP by 2022, from 57% currently;
  • Higher investment in key target areas – Targets €50 billion investment plan in environmental, health and education programmes.

What's next

The next step forward will be a move to nominate a new Prime Minister, which will occur by May 15th. The new Prime Minister will then work to form a majority in the National Assembly in legislative elections scheduled to take place in two rounds on June 11th and June 18th.

A key question now is whether Macron will be able to secure a majority in the National Assembly, given the En Marche! party is only a year old, as failure to secure a majority would make it more challenging to implement the required reforms. That said, we highlight that the French public has historically elected a majority in the National Assembly from the same political colour as the newly elected President. Current Members of Parliament from other parties including the Socialist party or the center-right are likely to join En Marche!, increasing the odds of a victory.

Implications for markets

A Macron win was largely priced in as European equities rallied strongly following the first round on April 24th (see Figure 1). As such, the market reaction following the final round has been fairly muted. Nonetheless, we believe the fairly benign political outcome bodes well for European markets by removing a key overhang.

We summarize our expectations going forward below:

  • Equities – With political risk largely abated, we expect the performance of European equities to be largely driven by fundamentals from here-on. Economic momentum in Europe is positive and the region has remained resilient. We expect that economic growth will continue to gain traction as domestic demand, which has been well behind the U.S., and European domestic demand is finally accelerating on the back of a rise in employment. This should in turn buoy revenue growth and profitability for European companies. Valuations in Europe also appear attractive relative to other regions and is experiencing positive estimate earnings revisions. Corporate tax cuts, if enacted, would also support the profitability of French companies.

European banks rallied following the first round results. Should the European Central Bank move to taper its QE program now that political risk has declined, European banks would likely benefit, particularly as they are trading at attractive valuations.  

  • Fixed income - As economic growth in the region is expected to improve and a meaningful political overhang now removed, government bond yields in Europe could experience further upward pressure. While rates markets could be under stress, the prospects of structural reforms alongside improving growth could lead to further spread tightening, resulting in corporate bond outperformance.
  • Currency – The euro strengthened following the first round and was close to its highest level since the U.S. presidential elections going into the runoff French presidential elections. Following Macron’s victory, the euro edged away from its highs as investors took profits after already pricing in a victory during the prior week. Longer-term performance will largely be driven by the actions of the European Central Bank (ECB).


While the outcome of the final round of French presidential elections was largely expected, it removes a key overhang on European equities, which bodes well for European equities going forward. Notably, European equities are trading at attractive valuations with positive estimate earnings revisions and strong earnings growth. We expect this to drive performance going forward. However, upcoming elections in Germany and developments in Italy will also be important to watch for the region. In this environment, government bonds within the region may see further pressure in the absence of further political or economic risks, though this bodes well for corporate bond outperformance as spreads could tighten further. We also watch the actions of the ECB, which will likely impact equities, fixed income and currency markets within the region.

Commentary and data are sourced from Bloomberg and Reuters except where referenced. The commentaries contained herein are provided as a general source of information based on information available as of May 8, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. The information contained in this commentary is designed to provide you with general information related to investment alternatives and strategies and is not intended to be comprehensive investment advice applicable to the circumstances of the individual. We strongly recommend you consult with a financial advisor prior to making any investment decisions. This document is intended for advisors to support the assessment of investment suitability for investors. Investors are expected to consult their advisor to determine suitability for their investment objectives and portfolio.  

 Published Date: May 8, 2017