French Election Watch
Macron in pole position
CIO WM Research | 24 April 2017
Dean Turner, CFA, economist; Ricardo Garcia, economist; Matteo Ramenghi, strategist; Thomas Wacker, CFA, analyst; Bert Jansen, strategist;
Thomas Flury, strategist
• With 97% of the votes counted, the only surprise from the
first round of the French presidential election is how accurate
the opinion polls proved to be. Emmanuel Macron will be
facing Marine Le Pen in the second round on 7 May. Opinion
polls suggest that Macron has a commanding lead for the
second round; he will most likely be the next president of
France.
• Markets have reacted favourably to this result, with the
euro rallying, French sovereign spreads falling, and French
equities rising in early trading. However, enthusiasm may
be tempered somewhat as there is still a chance, 25%
probability in our view, that Le Pen delivers a surprise win.
• We continue to monitor opinion polls, the campaign trail,
and market perceptions election risk via sovereign bonds and
currencies.
Our view
Emmanuel Macron is in pole position to be the next president of
France (fig. 1). Macron will face Front National's (FN) Marine Le
Pen in round two (7 May). He currently holds a commanding lead
in the opinion polls which, considering how accurate they were
for the first round, suggest that he will be France's next president
(fig 2). To be sure, this was a closely fought contest, with around
1.5 million votes separating first and fourth place (just over a 4%
gap). A number of politicians have come out in support of Macron,
including defeated rivals François Fillon and Benoît Hammon, but it
is too early to write of Le Pen just yet. However, at this stage, we
judge that the chance of a Le Pen presidency is only around 25%.
Markets have breathed a huge sigh of relief with stocks, bonds,
and the euro rallying as key tail risks have been reduced. The
biggest concern going into the vote was a situation where two antiestablishment candidates won through, which could have increased
concerns about a possible Frexit. This risk has now been significantly
reduced.
Source: Dreamstime
Related research
• French Election Watch: It's Macron vs Le
Pen, 23 April
• UK: Here we go again..., 18 April
• Italy: Still waiting for the dust to settle, 13
April
• EURSEK: The sleeping beauty, 12 April
• EU's Brexit guidelines: No cherry-picking,
31 March
• German Election Watch: Introducing the
Q&A, 27 March
• Spain: An uneasy limbo, 13 February
Long-term outlook
• The future of Europe, 13 January 2016
Source: UBS
Although the race is far from over, attention will soon turn to June's
parliamentary elections. To successfully implement his economic
program, Macron will need the support of parliament but his En
Marche! movement is unlikely to gain a majority. Nevertheless,
the initial reaction from the political establishment to the first
round result hint at him garnering cross party support. Beyond this,
investors are also likely to concentrate on other elections due in
Europe, in particular in Italy.
This report has been prepared by UBS AG and UBS Switzerland AG and UBS Europe SE. Please see important
disclaimers and disclosures at the end of the document.
French Election Watch
Within our Eurozone equity country strategy, we have a neutral
rating on the French stock market while political uncertainty
remains a little elevated. We maintain our preference for the euro
versus the US dollar which will likely benefit if, as is likely, Macron
becomes president of France.
Base case - Macron is the next French president
Throughout the campaign, opinion polls have consistently shown
that Macron holds a sizable lead over Le Pen in the event of a second
round run off between the two (fig 2). Previously in French elections,
the two-round electoral system has seen the anti-FN vote consolidate behind one candidate which has prevented them from gaining
office. The most recent example of this was seen in the regional
elections of December 2015. Back then, despite FN leading in the
first round in six of the 12 regions, they didn't win any in the second
ballot. In our view, we are likely to see a repeat of this on 7 May, with
the anti-FN, pro-European voters choosing Macron. The backing of
a number of politicians, including election rivals François Fillon and
Benoît Hammon, increases our confidence in this view.
Le Pen could still be the next president
To be sure, Le Pen could yet turnaround her deficit in the polls.
FN will now likely position the campaign as the nationalists who
support the French people (Le Pen) against the global elitists
(Macron). Changing the tone of campaign pledges to broaden her
appeal, voter turnout, and security threats in France, are all factors
that could boost Le Pen's chances of winning. That said, we judge
that the chances of Le Pen winning the presidency are around
25%.
Moving on
Once the 7 May result is known attention will soon turn toward
the National Assembly elections that take place on 11 and 18 June.
The outcome of these elections is key for either candidate as they
will need the support of parliament to implement their economic
program. Polling data for these elections is currently scarce, but it
seems unlikely that either candidate's party will gain a majority of
seats. Indeed, it is possible that the president has to work with an
Assembly where no party has an overall majority.
Fig. 1: Macron in pole position after the first
round vote.
Round one results (97% of votes counted), %
Emmanuel Macron
Marine Le Pen
François Fillon
Jean-Luc Mélenchon
Benoît Hamon
0
5
10
15
20
25
30
Source: Ministére de l'Intérieur, UBS, as of 24 April 2016
Fig. 2: Macron could inflict a heavy defeat on Le
Pen in the second round
Assorted opinion polls, five-poll moving average
70%
65%
60%
55%
50%
45%
40%
35%
30%
Feb-17
Mar-17
Macron
Apr-17
Le Pen
Source: Various polling agencies, UBS, as of 21 April
2017
In our view, this shouldn't present too many problems to Macron in
the short term. Initial reaction to his victory from the political establishment seems broadly supportive, and his pro-European, moderate reform agenda should gain enough cross party support. Thus,
we expect that the French economy can build on the foundations of
a strong start to the year and continue to make progress. We think
that the ECB Governing Council will remain on hold on Thursday,
but the backdrop of solid Eurozone economic data and reduced
political risk in France should mean that the ECB adjusts its forward
guidance in June/July.
More elections to come
As political risk in France subsides, investors will turn their attention
to list of other elections due in Europe. The UK and Germany will
vote this year, although we expect that neither elections will have
a material negative influence on risk appetite, their economies, or
monetary policy in the region. However, Italy, where elections are
due to take place by the spring of next year, may garner a little
CIO WM Research 24 April 2017
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French Election Watch
more attention. Recent polling suggests that if Italy voted today,
there would be no clear majority leading to a hung parliament and,
probably, to another election. This implies that any reforms would
be delayed. Markets remain concerned about falling support for
the euro from the public, and the risk of an Italian referendum to
leave the single currency. Nevertheless, we see a euro referendum as
highly unlikely scenario (for more information see Italy: Still waiting
for the dust to settle, 13 April).
Markets - a huge sigh of relief
Bonds: The market relief has triggered a rise in German Bund yields
and declining risk premiums for bonds of most other countries, in
particular peripheral and French bonds. We expect bonds of French
issuers to continue to trade at an additional, albeit reduced, risk
premium compared to peers during the run-up to the second round.
We think a Macron presidency would be perceived positively by
credit market.
Equities: The prospect of a Macron presidency should provide
support to equities as perceptions of Frexit risk have shrunk.
Additional support should come from his pro-growth economic
program. Banks seem particularly well placed to benefit from the
first round result and increased likelihood of a Macron presidency;
we are overweight financials in our Eurozone sector allocation. At
a country level, the French equity market has only slightly underperformed MSCI EMU year-to-date. We have a neutral recommendation on French shares within our Eurozone equity country
strategy.
FX: With equity markets cheering and investors gaining confidence
in French government bonds we expect also the euro to rise.
Between now and the final outcome on 7 May the upside for the
euro is probably limited with stronger forces unleashing once it
becomes clear that Marine Le Pen will not make it into the Élysée
Palace. We expect EURUSD and EURCHF to stabilize in a rough
1.08 to 1.10 range until that happens and eventually break higher
towards 1.12.
Of course, a surprise Le Pen victory is still possible. In our view, this
outcome would not be welcomed by investors and therefore could
lead to a reversal in risk appetite.
CIO WM Research 24 April 2017
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French Election Watch
Appendix
Terms and Abbreviations
Term / Abbreviation
Description / Definition
Term / Abbreviation
Description / Definition
A
E
UP
actual i.e. 2010A
expected i.e. 2011E
Underperform: The stock is expected to
underperform the sector benchmark
COM
Shares o/s
CIO
Common shares
Shares outstanding
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