Macron wins, but do new risks loom on the horizon?

Emmanuel Macron, the independent, centrist candidate who has never held elected office, has won the second round of the French presidential election.

The polls had indicated a Macron victory in the wake of his lead in the first round – and the polls were right. When Macron won the first round, markets rallied strongly, relieved that the possibility of having two extreme candidates in the second round had been avoided. However, this time the market response may be more muted as risk premia and volatility measures have already declined dramatically.

Many will simply be relieved that a contentious, sometimes fractious, election is over, but market watchers will now be looking ahead to the forthcoming parliamentary elections, which take place on June 11th and June 18th. Macron may have to form a coalition in order to achieve a majority. The risk of having to ‘cohabit’ with a prime minister from a different political party may weaken his hand in pushing through his reform agenda: this includes relaxing labor laws, reducing public spending and deepening European cooperation and integration.

Europe Bounces Back
More generally, the long-term outlook for Europe looks far more positive than it did a year ago. Data, for example, are generally positive, with signs of higher inflation, lower unemployment and improved economic activity. True, there are still upcoming elections in the U.K. and Germany, but with the Dutch and French elections over, some of the sting has been taken out of European politics. Indeed, should people begin to see the European economy improve, they’re less likely to blame Europe’s politicians for their economic difficulties, leaving the politicians better able to focus on key issues such as ‘Brexit’, immigration and geopolitics.
Of course, there are still uncertainties out there. For example, Renzi’s recent victory in his party’s primary election, while positively viewed by the market, could lead to an early Italian election and the uncertainty that brings.

Additionally, the recent sharp drop in energy prices is under scrutiny yet again. The global reflationary dynamic may be challenged in a scenario of lower commodity and energy prices. This has the potential to reappear on the radars of investors and could also have an impact on upcoming monetary policy decisions.

In our European portfolios, we continue to focus on relative value. In currencies, we like Scandinavia, in particular Sweden, but we have an underweight bias towards Switzerland, which we consider to be overvalued. In Fixed Income, we have a slight long credit bias and remain positive on European High Yield, despite some tightening in yields.

At a macroeconomic level, we continue to monitor the European Central Bank closely, alert to any sign that it might start tapering its asset purchase program, although core inflation has yet to tick up significantly. Once it does, however, the ECB will likely adjust its guidance and policies incrementally.

Ugo Lancioni – Senior Portfolio Manager, Head of Global Currency – Neuberger Berman