As happened in the first round, the indications from polls were reliable and Macron has won by quite a wide margin. The result is market friendly, because fears that one of Europe’s leading countries would be run by a Euro-sceptic president have vanished. Macron is a centrist and a moderate reformer, therefore it seems likely that his future actions will relate to supply-side reform, coupled with socially-responsible stabilizers. However, it must be kept in mind that he is not a direct associate of France’s two traditional political parties and he will have to work hard to convince the sceptics (those who voted for Le Pen plus those who abstained). The issue of these so-called “unheard voices” will not disappear and, in the case of a poorly-run administration, could gain ground again.
What’s Next for France?
Attention will now move to the French National Assembly elections in June. Political experts suggest that there is usually a 5-10% bonus for the political party that won the presidential election, but in this case things are different as the new President does not represent one of the traditional parties. Macron has benefitted from the void left by the socialists and his “party”, En Marche!, could complete a “takeover” of the French Parliament: initial polls on the outcome of the June elections suggests that En Marche! can obtain something like 249-286 seats out of 535 in mainland France, cannibalizing the socialist party (which is likely to drop from 280 to 28-43). If En Marche! does not gain a sufficient number of seats, a majority would need to be built around Macron’s electoral programme.
Macron has been quite clear and detailed in outlining his agenda. On economic policy, he proposes some spending cuts in order to finance cuts in corporate tax and a tax wedge on labour (to spur employment) and to enhance firm-level negotiations on a number of issues including more flexible working hours. Hence, it is fair to refer to these as supply-side, growth-friendly reforms. Regarding Europe, he has explicitly tackled the Euro-scepticism of his rival, suggesting the need to create a Eurozone budget and a Eurozone finance minister that has the ability to use money for both countercyclical actions, to support employment, and to promote common projects.
…and for Europe?
In our view, with the Dutch and French elections now behind us, the biggest threats on this year’s electoral calendar have passed. The appeal of the AfD in Germany is clearly diminishing, therefore the one critical ballot remaining concerns Italy, whose election is likely to take place in Spring next year. Now there are two on-going processes in Europe that could influence the outcomes of electoral votes (which could possibly gain strength after the German elections); the attitude towards Brexit and proposals intended to relaunch and strengthen European integration. Recent press speculation has suggested that Mrs Merkel is preparing a permanent co-ordination with France on two issues: security and the economy. Such an initiative could also be supported by the strengthening economic cycle.
Focus back on fundamentals: Earnings growth and next ECB’s move
As fears of political unrest have eased in the short-term, we believe reflation trades will take center stage again, with a renewed focus on economic fundamentals. Macroeconomic data has been consistent with a scenario of more robust and widespread growth in Europe. Reflecting this stronger economic activity, the corporate earnings recovery is also gaining momentum and appears more broad-based. Despite the recent temporary upticks in inflation numbers, price dynamics remain quite muted. We expect these limited inflation pressures will remain consistent and the expansionary monetary stance from the ECB will persist during the next few months.
Our preference for risk assets continues to be supported by macro and corporate fundamentals, especially for equity markets where valuations are not excessive (in Europe in particular) and earnings growth potential has not fully materialized.