Smartim: Market Note
9 May 2017
Smart Investment Management
French Presidential Election result
Sunday’s decisive victory for Emmanuel Macron over Marine Le Pen in the second round of voting for France’s next President
was largely expected by markets, which had risen strongly in the run up to the vote on the back of his significant lead in opinion
polls. This positive view of a Macron victory is understandable given the candidates’ vastly different views of the way forward
for Europe, with Macron’s positive view of the European project contrasting hugely with Le Pen’s open hostility to both the E U
and its currency. However, it should not be forgotten that, whilst less of a threat to the status quo than Le Pen, Macron still
represents a radical change within French politics. So what does his election say about the momentum of populist politics
around the Western world, if anything, and what can we take from the result as investors?
One obvious difference to what has gone before is Macron’s politics. Most populist parties that have gained significant
momentum in recent years have been at the right or left wings of the political spectrum. By contrast, Macron is a centrist so it
is easy to believe that he is not a symptom of the same populist uprising. However, neither of the 2 main French parties made
the second round of the Presidential election for the first time since the current electoral system was introduced in 1965 which,
taken with the fact that Macron only formed his party in April 2016, would certainly suggest that the electorate were voting for
change. Perhaps more interestingly, it indicates that a populist party does not have to be at the wider extremes of the political
spectrum to gain traction.
Whilst Macron’s victory can be taken as evidence that populism is alive and well, and now within centrist politics, to what degree
it can change the world remains to be seen. One common factor across elections where populist parties or candidates have
done well is that winning does not guarantee the victor the ability to implement their policies. Greece’s Syriza had enough
political control to form a government and pass legislation but came up against an overwhelming obstacle in the form of the
EU. In the US, Donald Trump is having issues getting even the less politically challenging of his plans through Congress, in spite
of the Republican Party having a majority in both houses. It is easy to question, therefore, whether Macron may find himself
similarly frustrated, given that his party did not exist at the time of the last French parliamentary elections so has no sea ts
currently.
Whilst the result of the Presidential Election may represent a significant shift in French politics at face value, it could well be that
meaningful change only comes if Macron’s En Marche party gains a majority in the French General Election in June. Whilst this
is possible, the fact that 4 candidates polled very closely in the first round of the Presidential Election suggests that the French
people are spread across a range of political views and parties, so it is certainly not a foregone conclusion. If En Marche i s
simply the largest party, which may be a more realistic goal, then Macron will need to form a coalition to govern. Forming and
managing a coalition is never easy and Macron is an unproven political operator, having never been elected to any political
post before, so it remains to be seen how effectively he could deal with that scenario. Finally, it is not impossible that En Marche
does not even form the largest party, with suggestions that the Republican Party may recover once their scandal-hit candidate
for President, Francois Fillon, is no longer at the forefront of the campaign. Therefore, whist the political establishment has
undoubtedly been given a massive ‘wake up call’ by the result, it remains to be seen how much change it brings.
Taking all of the above into account, most scenarios seem positive for markets. Unless the National Front surprises everyone in
the parliamentary elections and is able to form a government, there seems little chance of France rocking the boat in Europe.
Furthermore, with the reformist policies of both En Marche and the Republican Party being overtly pro-growth, the outcome
of the election is likely to be positive for risk assets. Therefore, with the data coming out of Europe continuing to improve and
the potential for measures within France to accelerate growth, we remain constructive on Europe whilst remaining diversified,
as the world contains many risks outside of European politics.
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