French Presidential Election – Preliminary Thoughts

Pioneer
By April 11, 2017 07:29

French Presidential Election – Preliminary Thoughts

Investment Talks

  • While the European economy is showing convincing signs of improvement and seems to have undertaken a sustainable growth path, the electoral outcomes continue to be perceived as possible threats to the current economic and political system.
  • Presidential and general elections in France are surely the most prominent event for the Spring and a potential victory for Marine Le Pen and the Front National would be perceived as a key geopolitical risk for the Eurozone as a whole.
  • Disaggregation risk for the Eurozone and debt redenomination risk will be the major concern for investors, should the polls show a rising probability of a Le Pen victory.
  • If the perception of a euro break up increases, we would expect weakening of the euro currency and strong volatility in the bond market. In this case, we would likely see a further widening of spreads, including peripheral spreads (particularly Italian), as well as a flight to quality versus German Bund, Swiss Franc and Gold.
  • From a Multi-Asset perspective, we maintain our positive attitude towards risk assets. At the time of writing, we attribute a low probability of a Le Pen win. We expect that the solid growth path that the Eurozone has built should help in facing the multiple geopolitical challenges, unless tail risks materialize. We now prefer European and Japanese equities to US Equities. We also consider the use of efficient hedging strategies (Gold) to help to protect porftfolios ahead of heightened political risks. On fixed income we see further spread widening as a tactical relative value opportunity in fixed income.
  • From an equity perspective, the French stock market, which has lagged behind the Euro area, has limited exposure to the Le Pen factor, being biased towards companies with a global reach. For this reason, signs of weakness could be seen as opportunities to add equity exposure through stocks with attractive valuations.
  • As already experienced in recent geopolitical events, we believe that active managers have the potential to exploit market mis-pricing with a tactical approach, while keeping a strong focus on hedging with an aim to protecting investors’ asset from tail risk events.  

Pioneer
By April 11, 2017 07:29

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