Markets have remained sanguine as the final two candidates in the French presidential election were revealed over the weekend, although fund managers are cautious about the long-term impact.
The second round of the presidential election will see Emmanuel Macron and Marine Le Pen go head-to-head for the top job in French politics.
Macron, a former economy minister under current president François Hollande and the leader of new party En Marche, is seen as a centrist and pro-EU. Le Pen, meanwhile, leads the populist right-wing party Front National, which has signalled support for exiting the EU.
However, the first round has exposed a split in opinion among voters with candidates from traditional political parties failing to pass muster.
Serge Pépin, European equities investment specialist at BMO Global Asset Management, said: “For the first time in modern French politics, both establishment parties, the Républicains and the Socialists, were eliminated in the first round.
“The French political landscape has changed radically, reflecting the anger the electorate in France has expressed.”
The first round did vindicate pollsters, with opinion poll findings reflected by the results.
Steven Bell, BMO chief economist, added: “The first round of the French elections was unremarkable in one sense: the result came in very close to the indications from the opinion polls.
“But the extent of the market reaction shows how nervous investors were, worried that the actual polls would deliver another shock result.”
Bell said: “So far this morning, French equities (futures) are up over 5 per cent and the EuroStoxx up over 3 per cent. That's quite a leap.”
Performance of CAC 40 vs Euro Stoxx over 1yr
Source: FE Analytics
Azad Zangana, senior European economist at Schroders, said: “For investors, the results are good news, highlighted by the over 2 per cent rise in the euro against the US dollar since last week.
"The centrist pro-European Macron will not only help stabilise the European Union, but also help build stronger support mechanisms.
“Compared to Le Pen, who wants to take France out of the euro, he is by far the preferred candidate.
“The campaigns will now pit the two lead candidates against one another, which we expect will mean a debate not along the usual left-right political debate, but based on inward versus outward-looking France.”
Zangana added: "The contest is not over yet, but investors are likely to take comfort and to begin to think about the more attractive valuations that European equities offer – a market that has struggled to keep up with the global reflation trade due to political uncertainty.”
BMO’s Bell said: “With the global economy steadily healing, the sigh of relief will be heard far beyond Europe. Risk assets will enjoy a marvellous Monday.
“Yes, problems with the European project remain. The Five Star Movement could still gain power in Italy next year, unemployment remains far too high in many countries, yet a serious hurdle has been overcome and we expect European equities to perform strongly from here.”
He added: “Bund yields will rise but they remain exceptionally low and peripheral spreads are set to narrow. The euro has bounced but the extent of its rise will be limited by positioning, as there were a few large positions still left short the euro.
“Europe has the prospect of several years of above trend growth with interest rates and inflation staying low. After years of disappointment, 2017 may be Europe’s year.”
Performance of BAML Euro Government index over 3 yrs
Source: FE Analytics
Timothy Graf, head of macro strategy for EMEA at State Street Global Markets, added: "With Macron heavily favoured in head-to-head polling against Le Pen, it seems most likely that the negative market scenarios – priced in over recent weeks – will recede between now and the run-off.
“As volatility subsides, spreads between French and German yields should narrow and we look for the euro to build on its recent stability against the dollar.”
But Trevor Greetham, head of multi asset at Royal London Asset Management, says investors should be cautious about opening the champagne just yet.
“The main worry for investors and traders watching the French election was that voters would be presented with a choice between anti-EU candidates on the left and right in the second round,” he said.
“With roughly 55 per cent backing pro-EU candidates over the weekend and the polls clearly pointing to a Macron victory in the run off with Le Pen, the euro rallied strongly.”
Performance of euro vs dollar over 1yr
Source: FE Analytics
“However, it’s worth noting that the French election is likely to be the first of several risks to test markets as thin summer trading comes into view,” added Greetham.
“Signs of a temporary peaking out in global growth, the impact of tightening moves in China and, first up, a potential government shutdown in the US at the end of this week, mean investors can’t pop the champagne corks just yet.”
Even a Macron win is likely to present challenges. Both candidates have highlighted reforms among their election pledges to help rekindle the French economy.
Neil Wilson, senior market analyst at ETX Capital, warned: “Assuming Macron goes on to win the second round, he will have a tough task assembling a government and pushing through the reforms the French economy needs.
“We can at least stick some of the big political risk to one side for a while, but with a major election in Italy looming there is considerable tail risk. Greece also remains a significant challenge.”