3 Things the European Investment Grade Fixed Income Team Talked About Last Week

1. French Election Result

As was widely expected, the second round of the French Presidential election yesterday saw Emmanuel Macron win by a comfortable majority, gaining 66% of the votes cast to 34% for Front Nationale’s Marine Le Pen. At 75%, the turnout rate was the lowest since 1969 when George Pompidou was elected. Attention now switches to the national assembly elections in June to see if Macron’s En Marche party can gain an overall majority, or whether they will need to form a coalition with another party. Traditionally there is a significant boost for the party that wins the Presidential election in the assembly elections, but it’s harder to call this time given that Macron doesn’t represent one of the established parties. The only opinion poll published so far shows Macron’s En Marche party with a slight overall majority. The newly-elected President has campaigned on a reformist agenda, promising firm-level negotiations that may include more flexible working hours and spending cuts to finance simultaneous cuts in corporate taxes. At close to 55% of GDP, French government spending is considerably higher than the Euro-area average of over 46%, and Macron has pledged to cut this to 52%, as well as reducing France budget deficit to 1% by 2022. All this will be music to the ears of Angela Merkel in Berlin, with Macron a strong pro-European leader. What will be less interesting to Mrs Merkel (and particularly Mr Schauble, Germany Finance Minister) is Mr Macron’s promotion of common Eurobonds, which is still very much a no-no in Germany. From a market perspective, much of the anticipated tightening of French government bond yields against German bonds has already happened. What may drive the next leg of tightening is whether Asian investors return to embrace French sovereign bonds as one of their favourite European debt instruments. Those investors have traditionally regarded French sovereign bonds as quasi-German debt but with a higher yield, but they sold large portions of their substantial holdings in Q1 2017 ahead of the elections. Should we see a return of these investors, looking to increase their French holdings, it could drive the French/German sovereign spread tighter.

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Macron Win Positive for European Risk Assets

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. Continue reading

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What’s Driving Global Equities? Earnings and Politics

Between potentially polarizing European elections and tough talk from North Korea, geopolitical risks are on the rise. This is not good news. However, for equity investors,
something important is happening to global earnings: they are also on the rise. Not only
are they up, but earnings revisions, an important forward indicator, are also increasing. Even more interesting is that, for the first time in years, the relationship between earnings upgrades and downgrades is better for international equities than for US equities, according to Bloomberg data. The ratio of upward earnings revisions is highest in Europe and Japan, and lower in the US and emerging markets—though they are still good by historical standards. Continue reading

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Spring in Europe

After years in which Europe has been an area of concern for investors, we are finally entering, in our view, a more positive phase. Going forward, we believe that five questions will be top of mind for investors.



1) Is this economic improvement sustainable?

The improved resilience of the euro area economy can be explained primarily by two exogenous factors highlighted by European Central Bank (ECB) President Mario Draghi in a recent speech: the oil price collapse that has boosted consumers’ purchasing power, and the ECB monetary policy that has favored a weaker currency, prompted credit easing conditions and favored a convergence in borrowing costs across different countries in the euro area. As the economy progresses, there are signs of a growth engine at work, making the ECB more confident that this recovery can turn into a self-sustaining one. These forces include: Continue reading

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How is the US Equity Market Pricing Trump’s Tax Reform?

What is President Trump’s tax reform plan about?

The Trump Tax Reform Plan, presented on April 26, was missing many details and left the market with many unanswered questions.

In our view, the plan’s five major elements are as follows: Continue reading

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