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Why Macron’s win is positive for European markets

The election of Emmanuel Macron as French president over Marine Le Pen has boosted sentiment over the outlook for Europe.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Monday May 08, 2017

Fund managers have reacted positively to the election of centrist Emmanuel Macron as French president after beating right-wing populist Marine Le Pen.

Macron received 66.1 per cent of the vote in the second round of the election to become the youngest ever French president.

A former economics adviser to president Francois Hollande, Marcon established his own political movement last year and had campaigned on a pro-EU stance, with more business-friendly policies.

Concerns over the future of the EU and the potential impact of the rise of populist politics had been raised ahead of the election, but controversial politicians such as Le Pen and Geert Wilders in the Netherlands have been defeated at the ballot boxes.

“The French election result confirms our view that markets until recently had overstated European political risks,” noted the BlackRock Investment Institute.

“Italian political risk and the country’s fragile banking system could move back into focus soon, however, particularly if the likelihood of early elections in late 2017 rises.

“These issues as well as Europe’s still incomplete banking and fiscal union leave fault lines that could be exposed by eventual ECB normalisation – and which bring into question the longer-term sustainability of the European monetary union.”

Ian Ormiston, European smaller companies fund manager at Old Mutual Global Investors, said: “The largest political bogeyman of 2017 has been laid to rest following Emmanuel Macron’s French presidential run-off victory over Marine Le Pen.

“This feat by the 39-year-old political novice, whose En Marche! party was only launched last year, is an incredible one.”

He added: “What impact will a Macron presidency have on the French economy? He seems to be a pragmatic centrist who should have the support of parliament to pass pro-growth reforms.

“Meanwhile, his pro-Europe stance will be important as the EU reformulates itself with the UK outside its borders, and we expect France to seek to set the agenda when it comes to EU and eurozone reforms.”

Performance of CAC 40 index over 1yr

 

Source: FE Analytics

Ormiston said he was likely to take some profits from his French holdings following a recent bout of market strength.


Steven Andrew, macro fund manager at M&G Investments, says the economic backdrop has improved “significantly” in recent years, reflected in rising growth, falling unemployment and higher expectations for corporate earnings and sales.

“This suggests that euro area equities, currently attractively priced, could deliver substantial investment returns in the period ahead,” he added.

“A disruption to the ‘euro-fragmentation’ narrative should encourage investors to focus more on improving fundamental data across the region. On the fixed income side, the debt of peripheral sovereigns such as Portugal should benefit from a reduced fear of political instability.”

Performance of euro vs sterling over 1yr

 
Source: FE Analytics

Trevor Greetham, head of multi asset at Royal London Asset Management, says the initial reaction by markets to Macron’s win has been “satisfaction, rather than euphoria”.

He said the euro had held on to recent gains while stock prices had risen slightly, adding that polls strongly in Macron’s favour had been factored into markets.

“Markets would have been seriously upset by a Le Pen win, which could have called into question the integrity of the euro area, setting off financial strains that would make Brexit look like a walk in the park,” he said.

“Challenges remain during the volatile summer months, with stock prices likely to dip on heightened geopolitical stress or signs that global growth is coming off the boil.”

He added: “We have lightened up our equity exposure in the multi asset funds we manage, with a view to buying back at lower prices, if markets do dip.

“Longer term, we see a continuation of the positive backdrop of recent years, with loose monetary policy and steady growth driving stock prices higher.”


Heading into 2017, investors had been concerned by the political risk hanging over the eurozone, says Architas investment director Adrian Lowcock, noting that the victory would help settle nerves and reduce the risk weighing on the region.

He explained: “Investors can now focus on the fundamentals of the European economy where confidence has been rising and economic growth has returned. At the same time the valuations of shares have remained below those of their US peers.

“Investors in the UK tend to be significantly underweight Europe as they often avoid the region because of its complex political landscape.

“This ignores the fact that European markets offer investors access to many global companies as well as more domestically focused businesses which have access to a market of over 440 million people. European shares should form an important part of a well-diversified portfolio.”

Performance of MSCI Europe over 1yr

 

Source: FE Analytics

Despite the comprehensive victory over Marine Le Pen, some have expressed disquiet over the 11 million votes secured by the right-wing populist.

Jaisal Pastakia, investment manager at Heartwood Investment Management, says the defeat of Le Pen does not mean the rise of populism in Europe is over, noting other challenges to mainstream politics.

He said: "Is it the end of populism in Europe? Not necessarily. Populist parties are still gaining a meaningful share of the popular vote – whether in France, the Netherlands or Italy – and this has been sufficient in getting their voice heard and to sway policy.

"For now, though, global investors will be reassured that the risk of an anti-establishment candidate taking charge of Europe’s second largest economy has been removed. This may attract further investment flows in European equities.

“We have had a longstanding overweight in the market on the basis of improving macroeconomic fundamentals and corporate earnings recovery, and we maintain this overweight.”


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