That Marine Le Pen failed to win the first round of the French presidential elections suggests that populists’ successes in some countries will not necessarily be repeated.
In Spain, Podemos finished second in terms of votes but third in terms of seats at the 2016 elections. In the Netherlands, Geert Wilders’ PVV came second, eight points behind the liberals of the VVD. Each country is different and, for all of their faults, European political systems are more resilient than generally feared. Any complacency about the French election would, however, be misplaced: the anti-European, protectionist candidates (Le Pen, Melenchon and Dupont-Aignan) won almost half the vote, and clearly the second round is still to come.
French presidential election first round results
Source: Financial Times
How likely is a victory for Marine Le Pen? What would be the consequences?
At the time of writing, polls predict a victory for the pro-European, market-friendly centrist candidate Emmanuel Macron. However, nearly half of French electors voted for protectionist candidates in the first round and so are unlikely to vote for Macron in the second round. Consequently, the turnout could be lower compared to the first round and the race much tighter than currently indicated. Le Pen is portraying herself as the candidate of the people against Macron representing the French elite. She has dropped her idea of holding a referendum on France leaving the euro and is instead trying to transform the presidential election into a vote on globalisation.
Has the risk of Frexit receded?
We think the risk of a French exit from the euro after the presidential election was widely overstated. Even if Le Pen were to be elected president, this does not mean that she would get a majority to govern. The second round of the presidential election will be followed by the so-called third round (parliamentarian elections) in June. 577 MPs will stand for election in a two-round process and the newly elected parliament will effectively govern the country. The Front National currently has two MPs and getting to 30 or 40 would be considered a good result for them. So it is highly unlikely that Le Pen would have a majority of seats in the parliament. After the very weak performance of their presidential candidate, the Socialists are in disarray and will almost certainly lose a good number of their MPs. Macron has not even nominated his candidates in most seats.
So the most likely scenario is a majority for the centre-right Republicans and some kind of ‘cohabitation’ between them and Macron, along the lines of what happened under Francois Mitterand in 1986 and 1993. If this is the case, a market-friendly government would be the expected outcome.
How do you adapt the fund’s positioning to political risk in Europe?
We always hope for the best but prepare for the worst. Our starting point is to expect the worst possible outcome for any election. We then ask ourselves how a harmful result – for example Marine Le Pen being elected as French president – would impact the companies we are interested in. If the downside risks are too great, we simply do not get involved. Our investment universe is very wide and diverse, with many high quality companies. We do not have to invest in stocks that are dependent on binary outcomes. Once we have checked the resilience of potential investments to external shocks, we look at their valuations as well as the potential upside. Only a very few stocks meet our high standards and make it to the portfolio. They are selected on their own merits irrespective of their passport.
What have you been buying recently?
We recently used weakness in the price of two high quality companies to add them to our portfolio. Kone is the world’s fourth-largest manufacturer of elevators and escalators and the market leader in China. Its share price had fallen as investors had become overly concerned about the uncertainty in China. A third of Kone’s sales come from maintenance (where margins are high) while new equipment and modernisation are growing rapidly outside China. Earnings per share should continue to grow at a good pace.
Performance of Kone & Ontex over 1yr
Source: Google Finance
Ontex is a leading supplier of disposable personal hygiene products. It has made two acquisitions recently, one in Mexico and one in Brazil. Both are well timed and attractively priced. But the company had to issue stock to pay for these acquisitions and the resulting weakness in its share price gave us an opportunity to buy an attractive compounder of earnings cheaply.
Is it the right time to invest in Europe?
Continental Europe is replete with appealing investment opportunities: high quality companies selling at attractive prices. The consensus, not least in the Anglo-Saxon press, has been that Europe is dysfunctional – both economically and politically. In fact, economic growth is strengthening in Europe while it is starting to disappoint in the rest of the world. For example, the manufacturing Purchasing Managers' Index (an indicator of the health of the manufacturing sector) is now higher in the eurozone than in the US and emerging markets and last month grew to its highest level in six years. More anecdotally, many of the companies that we talk to cite continental Europe as one of their fastest-growing regions.
Performance of the MSCI Europe over 10yrs
Source: FE Analytics
Politically, the populists have not succeeded either in Spain nor in the Netherlands and Marine Le Pen failed to reach first place in the first round of the French presidential election. While political risks remain, perhaps they are not as great as previously feared.
Mark Page and Laurent Millet, managers of the Artemis European Opportunities fund. All views are their own and should not be taken as investment advice.