BlackRock Investment Institute

France votes:
European risk reduced

By BlackRock Investment Institute

Business-friendly and pro-European Emmanuel Macron became the clear front-runner for French president after winning the first-round vote, materially reducing perceived European political risk.

Key views

  • We see European risk assets gaining as business-friendly Macron looks poised to build on momentum to become France's next president
  • We see yield spreads on French government bonds tightening but safe-haven German bunds coming under pressure
  • We expect some political risk premium to remain heading into the June legislative elections

Centrist Emmanuel Macron won a clear victory in the first round of the French presidential election, edging out runner-up Marine Le Pen of the far-right National Front. They will now face off in the final round on May 7, narrowing the field after an unexpectedly tight four-horse race roiled French politics and markets.

We see this as a positive surprise for risk assets in the near term. Business-friendly and pro-European Macron, who has maintained a large winning margin in head-to-head polls with Le Pen, can now build on his momentum. Other candidates on both the left and right said they would vote for Macron while issuing strong statements against the National Front. We see markets pricing in some remaining political risk, given the potential for surprises in the next two weeks. Any significant shift toward Le Pen in the polls could dampen investor sentiment due to her anti-euro stance.

We are positive on European shares and believe reduced political risk will allow investors to focus on the region’s improving growth.

This result should lead to a material reduction in perceived political risk in Europe. We do expect some risk premium to linger until legislative elections in June. Both Macron and Le Pen are not part of the mainstream parties that have dominated French politics in the Fifth Republic for nearly 60 years. If Macron becomes France’s next president, he may struggle to implement his agenda without a stable parliamentary majority. We expect Italy to be the next focus of European political risk.

We are positive on European shares and believe reduced political risk will allow investors to focus on the region’s improving growth. Europe stands to benefit from global reflation, and we see attractive valuations in cyclical shares.

We see French government bonds recovering relative to their German bund counterparts, shrinking yield spreads. At the same time, we expect safe-haven bund yields to reverse some of their recent drops and yields overall to climb. We are underweight European fixed income due to risks that the improving economic outlook will spur higher bond yields and wider spreads on investment-grade corporate bonds – especially if markets sense the European Central Bank is moving toward winding back its asset purchases.

Macron started his career as a civil servant before becoming an investment banker and serving as President François Hollande’s economics minister. His platform has centered on renovating France’s economy for the 21st century while openly embracing the European Union. Macron has straddled left and right in his independent run: proposing some deregulation and lower payrolls taxes to boost incomes, yet also strongly defending France’s social system. He has proposed a single eurozone budget and finance minister.

Le Pen, who has tried to soften the National Front’s image after taking over leadership from her father, has run on a nationalistic platform: a referendum on EU membership, pulling out of NATO, restoring the French franc. She claims to be the one candidate committed to conserving French secularism and social welfare. Le Pen wants to create a border-control force (pulling out of Europe’s Schengen agreement on open borders in the process) and hire additional police and security forces. She has also proposed a tax on foreign workers.