Brian BollenSuccess 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.”
Macro implications
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.
In brief
- 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.
“This is particularly important given that French banks tend to rely more heavily on market funding than other European banks,” he says.
Telecoms to benefit
The telecommunications sector also looks set to be affected by Macron’s victory, according to Tenerelli.
“For some time, there has been support within the industry for greater consolidation within French telecommunications, but efforts toward this end have so far been hindered at the political level,” he said.
“Macron’s pro-business leaning means that he is likely to be more amenable to industry consolidation, which should be positive for the larger incumbent players.”
Slightly overweight France
“In European equities, we are slightly overweight France with a broad spread of exposure, from domestic stocks with strong franchises, in areas like telecommunications and banking, to international businesses in sectors like engineering and consumer discretionary,” said Tenerelli.
The firm's lowest exposures are in those areas that are dependent on strong growth, such as materials and energy, where T Rowe Price feels valuations are slightly ahead of themselves, he concludes.
A modest positive
For Valentijn van Nieuwenhuijzen, chief strategist and head of multi-asset at NN Investment Partners, the outcome confirms that while populism in Europe remains a threat, it is not the directional force for government policy that it has become in the UK and the US.
“The effectiveness of Macron as president...will depend heavily on the outcome of the parliamentary election in June,” he says. “For now, we see this as a modest positive for markets as most of the good Macron news was already priced in, in recent weeks.”
