Macron’s victory in French presidential election bodes well for Europe

Emmanuel Macron prevails over Marine Le Pen in second round of French presidential elections by a substantial 66-34 score

With the threat of Le Pen’s anti-EU and anti-euro course now squashed, European markets can breathe a sigh of relief. That said, the election outcome was well discounted and we would not expect a “surge” in European assets from current levels. We see, however, incremental strength from the context that international investors are under-exposed to the region given the perception of elevated political risk.

With respect to France, the upcoming parliamentary elections on 11 and 18 June are likely to deliver a fragmented National Assembly and it remains to be seen how the new president – whose party En Marche! has zero seats in the current assembly – will be able to deploy his landmark reforms affecting pensions and the jobs market. Such reforms are essential to boost trend growth and contain excessive public spending.

History tells us that even if the new president managed to command a majority in parliament, he would face formidable opposition “in the street”; we do not need to remind the reader that preceding governments invariably yielded to such pressure in the past.

With respect to Europe, market participants will in due course turn their attention to Italy, where general elections are bound to take place before May 2018.
Like France, Italy is suffering from a stagnant economy and endemic unemployment. Like France, it has so far failed to decisively reform its economy and the political landscape has seen the emergence of a large antiestablishment party – the Movimento 5 Stelle.

Everything else being equal, we would expect euro zone related assets to continue to benefit from positive investor flows, though recent strength probably caps near term upside potential.

Safe-haven assets such as German government bonds or gold should continue to face some selling pressure.

Vontobel Asset Management