Emmanuel Macron and Marine Le Pen will face one another in the second round of the French election in two weeks. The market reaction has been positive, as investors begin to look past the risk of a Eurozone breakup and price in a likely Macron presidency.
French voters went to the polls on Sunday in the first round of the French presidential elections. Populist victories in the UK’s Brexit referendum and the US election have intensified concerns that the far-right Front Nacional could win, putting a Eurosceptic president in the Élysée Palace.
However, to investor surprise, Macron came in first securing over 23.9% of the vote. Polls indicate that in the second round run-off Macron could gain 65% of the vote, securing his election as president. This would put him in a stronger position to govern than a narrower majority, putting his agenda for reform, increased public investment and greater European solidarity in easier reach. Markets are already discounting a Macron victory and removing the attendant fears of a break-up of the Eurozone.
With 21.4% of the ballot, Marine Le Pen secured enough votes to go through to the second round of voting. Radical left-wing candidate Jean-Luc Mélenchon, whose campaign had gained significant momentum in recent weeks, secured only 19.6%, behind conservative centrist candidate François Fillon on 19.9%.
The initial market reaction to the first round outcome has been extremely positive. The rapid ascent of Mélenchon had raised fears that he would block more moderate candidates from proceeding to the second round, leaving voters to select between two Eurosceptic candidates, both lacking fiscal credibility.
What does this mean for investors? While the electoral race is not over, near term political risk has diminished and investors may now be able once again to evaluate European assets based on fundamentals.
With European and global growth enjoying positive momentum and European assets trading at cheaper valuations compared to the US, we believe a recovery in European assets is likely in the medium term. Additionally, many European companies are geared to the cyclical economy and so benefit even more from a cyclical recovery.