Success for Emmanuel Macron over Marine Le Pen in the second round of France's presidential election signals stability, for now, according to Kenneth Orchard, global fixed income portfolio manager at T Rowe Price, a US global asset management firm.
“French 10-year bonds were trading up to 50 basis points over German 10-year bonds recently, but we expect spreads to tighten moderately from those levels closer to last year’s average levels,” says Orchard. “After that...the markets will begin to focus on other issues.”
As a committed supporter of the European Union, Macron is expected to work well with German Chancellor Angela Merkel strengthening the Franco-German alliance on which the bloc depends, Orhcard notes.
On Brexit, the president-elect has emphasised the importance of “defending the integrity” of the EU’s key principles on labour movement and trade, he adds. As a result, the UK will be facing an even tougher negotiating partner in Brexit talks than previously thought.
However, Macron’s publicly expressed “sympathy” for the economic plight of countries such as Italy and Greece will raise hopes in those countries that he may help to soften what they regard as German-imposed austerity.
- Slightly long Italy, Portugal and Cyprus
- Slightly overweight France
- Very underweight Spain
- Telecoms to benefit
- Materials and energy overpriced
Positioning and outlook
After the relief over Macron’s victory has subsided, investors in Europe will soon begin to focus on other potential risks. In addition to the looming Italy election, there is the possibility of upheaval in Spain if Catalonia presses ahead with an independence referendum.
“We are currently neutral on peripheral Europe but are looking to adopt an overall underweight position at some point,” says Orchard. “As things stand, we are slightly long Italy, Portugal, and Cyprus and very underweight Spain.”
Better for European equity
A Macron presidency is better for European equity markets than Le Pen would have been, adds his colleague, Dean Tenerelli, portfolio manager European equity strategy. The result lowers geopolitical risk in the region and should unlock economic opportunities, he says.
Macron favours gradual deregulation measures, which is clearly welcomed by the French banking sector, he notes. His victory should also continue to see a narrowing of French sovereign spreads, which automatically translates into lower cost of equity and funding.