As Macron and Le Pen go head-to-head, how’s your smart portfolio positioned?
Emmanuel Macron and Marine Le Pen will go head-to-head in the second round vote of the French Presidential elections. European risk assets have rallied in the expectation of a Macron win, but how sustainable is the rally, and is your IG Smart Portfolio positioned for one?
The first round of the French Presidential Election conformed to the expectations of the rather mocked polling industry, with Emmanuel Macron (En Marche!) and Marine Le Pen (Front National) cementing themselves in the second round of the vote on 7 May.
The result is still a seismic shift in the French politics, where for the first time in living memory there is no representation from any of the traditional French political parties in the second round of the vote.
European markets surged higher in the first session after the result, with the CAC 40, an index of the largest French companies, up more than 4.0% at the time of writing. The euro also staged a rally, so far gaining 2.1% against the Japanese yen and 1.2% against the US dollar and sterling.
The market movements reflect expectations that Macron will beat Le Pen in the second round (polling agencies forecast a 60% to 40% win), and become the French president. Macron has campaigned on a centrist ticket (although he was the Minister of Economy for the Socialist party) that is unashamedly pro-business and pro-EU, advocating further integration of the European parliament and EU border agency, and supportive of France’s membership of the euro. In the short term at least, this would strengthen the eurozone and should see the borrowing cost between French and German debt narrow.
While a Macron win would be good for the markets, French society is divided, as demonstrated by 41% of the first round vote supporting anti-EU parties. Whether a future president Macron, if that’s what comes to pass, can push through his economic reforms remains to be seen, and the French parliamentary elections in June will take on greater importance than ever before. A 23.8% share of the vote is hardly a ringing endorsement, and it will be a challenge for him to build up his political support base from a short-term movement (membership of En Marche! is free) to something that can take on the trade unions and push through the economic reforms that he believes are required for France to become more competitive.
What does this mean for your IG Smart Portfolio?
France makes up just 3.7% of the MSCI World Index, so the direct impact on client portfolios is not that large. IG Smart Portfolios are currently positioned with an overweight to Europe ex-UK, compared to a market capitalisation index, based on expectations that improving economic fundamentals and a reflationary global economic environment will be good for European assets. With the positive market sentiment towards Donald Trump’s election victory beginning to fade, a return of investor interest towards Europe is likely to be a welcome driver of short-term performance for our allocations.