Macron’s Win
Is a Loss for
Euro-Phobia
May 2017
With his victory as France’s new president-elect, Emmanuel Macron can celebrate – for now.
Much will depend on whether he can secure a clear parliamentary majority in June.
Nevertheless, this win for pro-EU Macron should help investors see the more positive side to
the European story.
Key takeaways
Mr Macron’s victory is good for the EU, but France’s upcoming legislative elections will determine how
effective he can be.
Despite uncertainty about Italy, investors should now be able to concentrate more on the positive
economic side to the European story.
With improving unemployment and manufacturing numbers, European equities should continue
outperforming global equities; the euro is also likely to strengthen.
With the election of Emmanuel Macron as France’s next
president, the European Union breathes a sigh of relief,
although the results of the National Assembly election in
June will have a significant bearing on his ability to
accomplish his political agenda. Yet even with this
resolution in France, some degree of political uncertainty
will persist as Europe’s ongoing “super cycle” of elections
continues, with votes in Germany and Italy on the horizon.
Mr Macron’s victory means France and the EU should be
able to move past some of the more divisive issues raised
during this presidential race, and investors can now
start to focus on the positive economic story emerging
in Europe:

Mr Macron is pro-euro and pro-European Union, and
his victory is clearly a win for the EU – though it could
make Brexit negotiations more difficult for the UK if
France and Germany become more tightly allied.

Mr Macron’s victory decreases the possibility of a
“Frexit” from the EU and should prevent NATO from
being further undermined.
Macron’s Win Is a Loss for Euro-Phobia | May 2017

Ms Le Pen’s loss means a setback for the forces of
nationalism in France, though her National Front
party has developed a formidable amount of support.
Anti-EU feelings can still resurface, particularly given
that Mr Macron remains a conventional, proestablishment politician.
Two scenarios for Mr Macron
Mr Macron will need to cooperate closely with the
incoming class of French legislators to have any hope of
enacting significant policy changes. As such, we see two
scenarios to consider after June’s elections:
President Macron’s party does not gain a clear
parliamentary majority
Unlike Germany, France has less experience forming
political coalitions, which could limit Mr Macron's ability to
pass reforms. Under this scenario, which we believe is
more likely, the markets would be uncertain about his
room to manoeuvre.
President Macron’s party wins a parliamentary
majority
As illustrated by the market’s reaction immediately after
the first round of presidential elections, this scenario
should be bullish for euro-area risk assets, such as equities
and bonds from the peripheral areas of the euro zone.
Investment implications
In general, Mr Macron's victory and the accompanying
rejection of euro-phobia should reduce some of the
market’s worries about political risks. This should help
investors concentrate on the more positive economic side
to the European story.
Macroeconomic indicators
Unemployment numbers look much better than they did
three years ago, and many economic indicators show
positive signs. For example, recent purchasing managers
index numbers show steadily improving manufacturing
output in the euro zone.
Interest rates
Despite some investors looking for higher rates in the
immediate future, we don’t expect to see a real change
for at least 6-12 months. Indeed, we also don’t expect the
European Central Bank to begin tapering until 2018.
The euro
The currency is likely to strengthen on the back of a better
political outlook as well as better cyclical data and
expectations of tapering in due course.
Equities
There is a good chance that political risk will be priced
out further. Based on our analysis, European equities –
which have shown higher revenues and stronger order
books and should continue to outperform global
equities – will have further upside potential as political
uncertainty declines.
Fixed income
Our outlook for French government bonds is slightly
positive. If Mr Macron finds parliamentary support, we
expect tighter credit spreads, a strong reduction of
French-specific risk and tighter spreads in the euro-zone
periphery; without it, we expect a mild risk appetite in
fixed-income markets, with some event-driven spikes
of volatility.
What’s next for France – and Europe
While political developments make headlines that
influence the financial markets, cyclical forces remain key
drivers of performance. As long as the cyclical backdrop is
positive, we should be in a good environment for risk
assets – provided we don’t get a clearly negative signal
from the political realm. The outlook for monetary policy,
both in the US and in the euro area, will also continue to
be a key determinant for markets.
But politics continue to dominate much of the discussion
for policymakers, voters and investors alike. We now
expect the markets to turn some of their focus to Italy –
the elephant in the room. It has an economy with weak
growth rates, a weak banking sector and a governing party
at risk of splitting up. If Italy does not hold a snap election
this year, a regular election will be held in the spring of
2018. The risk of anti-European forces coming to power at
either juncture is reasonably high.
Overall, however, Mr Macron’s victory brings with it the
potential for a new and constructive agenda to be formed
between France and Germany. This could help Europe
move closer toward integration, and provide further
reassurance for investors.
Macron’s Win Is a Loss for Euro-Phobia | May 2017
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