French presidential election: Macron wins big

May 7, 2017 / By BlackRock Investment Institute

Key points

  • We could see moderate gains in risk assets, with Macron’s victory largely priced in after his first-round win.
  • Legislative elections in June will be a key yardstick of Macron’s ability to form a coalition to advance his reform agenda.
  • We are positive on European equities, and see the reduction of political risk helping investors to refocus on the region’s improving growth prospects.

Overview

Independent centrist Emmanuel Macron has prevailed over the far-right Marine Le Pen in the final round of the French presidential election. Macron’s comfortable win of around 65%% of the vote marked a rebuke of Le Pen’s Front National party, which ran on a nationalistic platform that included a referendum on leaving the European Union.

We could see moderate gains in risk assets, with Macron’s victory largely priced in after his first-round win.

Legislative elections in June will be a key yardstick of Macron’s ability to form a coalition to advance his reform agenda.

We are positive on European equities, and see the reduction of political risk helping investors to refocus on the region’s improving growth prospects.

Broad European equities

The EURO STOXX 50 Index (+10%), the MSCI Europe Index (+8%) and the MSCI Europe ex-UK Index (+9%) have doubled their year-to-date gains on a net total return basis in euros, in the period following the first round of the French election on April 23.1 Meanwhile, this year, $14 billion has flowed into broad European equity Exchange-Traded Products globally, but that is not yet enough to reverse the $36 billion net outflow recorded in 2016, despite signs of investors outside Europe beginning to increase allocations. Up until the first round of the French election, flows were primarily coming from European domiciled investors; in the week following round one, $3.6 billion have flowed into European equity ETFs, of which $2.6 billion were from US investors.2

Investors may take the second round result as a signal to increase European equity allocations further, in our view, as perceptions of political risk reduce and focus returns to fundamentals. Global earnings are picking up as we move through the first quarter reporting season, and the improvement is stronger in Europe than in the U.S. –the European earnings-per-share growth rate is double that in the U.S.3 European equites continue to compare well on a relative value basis to developed market peers.

French equities

The MSCI France Index has only recently started outperforming the MSCI Europe Index. The MSCI France Index is also trading at a discount versus its five-year average price-to-earnings ratio. French equities could benefit from a result that is perceived as market positive.

 

Unless otherwise stated, all data in this document is sourced from Bloomberg as at  May 4, 2017.

1. Source: Bloomberg, 04 May 2017. Based on net total EUR returns from January 2, 2017 to May 4, 2017.

2. Source: BlackRock and Markit,  May 4, 2017.

3. Source: JP Morgan, data as at May 4, 2017.