Industry warns of practical tests ahead for Macron to stamp his mark on the French economy
Industry commentators are remaining cautious in their outlook for both France and Europe despite centrist liberal Emmanuel Macron’s win in the French presidential election.
Although Macron won with the second round of the election as anticipated, receiving 66.1 per cent of the votes cast against Marine Le Pen’s 33.9 per cent, he still has the “huge obstacle” of the National Assembly elections in June, when he will be up against the more established parties in gaining a majority.
The initial opinion polls suggest Macron’s En Marche could be the largest party, but without winning the majority he would end up working with a prime minister from another party and could struggle to implement the reforms he has promised, such as cutting taxes and reducing the deficit by €60bn.
Valentijn van Nieuwenhuijzen, chief strategist and head of multi asset at NN Investment Partners, says: “The effectiveness of Macron as president, especially with respect to his domestic agenda, will depend heavily on the outcome of the parliamentary election in June.”
David Hussey, head of European equities at Manulife Asset Management, warns Macron could be all talk.
“Macron promises to introduce economic reform and modernize the French economy – just like many of his predecessors. But I believe there is a more than fair chance that he will not ultimately have the mandate or power to do that. If history repeats itself, little will change in reality,” Hussey says.
He adds: “Should Macron fail in his efforts to reform the economy and create new jobs, and the anti-globalization forces grow in strength in the wake of a weaker global economy, it is more than likely that the populist parties will be back. In my view, political risk will remain around the western democracies until the wages and jobs situation improve. And this will translate into persistent uncertainty and volatility for the markets.”
Ready for a referendum?
Ed Smith, asset allocation strategist at Rathbones, warns there is still the possibility of a referendum being called.
He says: “Remember that Marine Le Pen’s party polled well in more rural towns and villages. Under Article 11 of the French constitution, any group of at least 20 per cent of MPs, supported by at least 10 per cent of the popular vote, can call a referendum.
“While we do not believe that Euroscepticism in France is enough to win a ‘Frexit’ referendum if this were to play out, the political noise would continue. Of course, the political noise in the wider region will continue regardless thanks to the Italian and German elections due later in the year, which could cause uncertainty.”
Smith adds: “So while we breathe a sigh of relief after Sunday’s results, we remain cautious on the region and maintain our underweight.”
LGIM’s European economist Hetal Mehta says there is still considerable event risk in 2017, with Macron’s relationship with his German equivalent essential to ensuring Europe’s success.
Mehta says: “The German election in September is the next key milestone. The relationship between France and Germany will determine the future of Europe and how Macron and his German counterpart work together to address the rise in populism, the challenges of immigration and structural weaknesses, will be high on the agenda.
“Then it is Italy’s turn where a general election has to be held by May 2018. Italian political risk should not be underestimated given the strength of support for the anti-establishment Five Star Movement.”
The reaction to Macron’s win in the stock markets was muted, having been priced in, with the CAC 40 marginally down by 0.9 per cent to 5,382.78 at lunchtime today.
Stephen Mitchell, head of strategy, global equities at Jupiter Asset Management, says Macron’s key appointments will prove pivotal to the performance of equities.
He says: “Shares should react steadily – but to build on the recent rally we need to assess Macron’s key appointments as he turns En Marche from a movement into a party. The next step is thus new appointments including a prime minister and for Macron to oversee legislative elections that will deliver a parliament which should hopefully assist this young leader’s vision for revitalising France.”
Ian Ormiston, European smaller companies fund manager at Old Mutual Global Investors, says he plans to take profits from his French holdings following the recent rally.
“We seek to invest in companies where as much of the investment case as possible lies in the hands of the company management, whether it be through a growth agenda, acquisitions or cost-cutting,” he says. “Macroeconomics is never our main reason for investing in a company so while we welcome any improvement in growth potential in France, we do not expect it to be a stand-out contributor to returns in 2017.”
Mehta adds that while equity markets “can return to focusing on the more mundane issue of earnings prospects”, which look positive, there are “pressing challenges in the months ahead” for the fixed income markets.
“On our estimates, the European Central Bank is on its way to owning nearly a quarter of the sovereign and non-financial corporate bond markets. The prospect of slowing down the pace of those purchases has the greatest potential to disrupt the markets in the second half of the year.”