French elections: euroscepticism risks

As we approach the first round of the French Presidential election, markets are getting nervous again as the polls show increasingly a four horse race with Le Pen expected to win the first round.

We think the market is correct to build in a risk premium, but we see the risk of a powerful Eurosceptic presidency as a low probability. Le Pen appears unlikely to win the second round, although probably by a smaller margin than implied by the polls, given the large number of undecideds. Even if she were to win, there is very little chance that the National Assembly would allow her to do very much to undermine France’s commitment to the Euro.
Having said that, markets may be nervous over the next couple of months if she does well in the first round, especially if the second round is a run-off between the far right and the far left.
For now, within our Global Multi-Asset Income fund we have a number of Eurosceptic hedges, including a short position in French Government bonds versus their German equivalents, and a short in the Euro versus other developed European currencies.
Our bigger concern remains the risk, albeit not our central case, that Italy gives Eurosceptic parties a majority in a probable election later this year.

John Stopford – Portfolio Manager – Investec