French Elections Produce a Clear Winner

European financial markets should continue to take comfort

May 8, 2017

The final round of the French election on Sunday, May 7, produced a clear winner with a victory by Emmanuel Macron. We spoke with Luc de la Durantaye for his views on the implications of the result and the overall outlook for Europe.

Initial Reaction

Luc de la Durantaye

Head of Asset Allocation and Currency Management,
CIBC Asset Management

European financial markets should continue to take comfort from this weekend’s results from the French election with the win by Emmanuel Macron, the independent centrist who founded the new political party “En marche”. Global financial markets should also gain some reassurance from the French election results in several ways. First, contrary to Brexit or the U.S. election results, the opinion polls guided investors correctly. This happened not once but twice, during the first and second round of voting! More importantly, France avoided turning to a more extreme far right political party in favour of “Frexit”, which would have put the integrity of the European Union at serious risk.

Now we must turn our attention to France’s parliamentary elections which are set for late May/early June. The result of these elections will likely determine the degree to which structural reforms proposed by the political platform of Mr. Macron can be implemented. Since Mr. Macron’s party is relatively new (less than a year old), he is unlikely to gather a majority following the French parliamentary election. Nevertheless, other centrist parties are likely to accept forming a coalition with Mr. Macron and push ahead with the core of the intended structural reforms.

Recent European economic data might also help provide a tailwind to the new prospective coalition government. Recent business sentiment is improving (latest Purchasing Manager Indices recently scored multi-year highs). Unemployment, supported by a still accommodative European Central Bank, looks set to fall further in the coming months. Overall, the political risk premium that was pledging European assets may continue to dissipate. The German election, scheduled for September, is not expected to become a roadblock, as the two parties leading in the polls are both pro-European and financial market friendly.

In summary, the positive French election results should reassure financial market participants that the threat of populism from Brexit and Trump administration results have been stopped at the door of Europe. This adds to the cyclical upswing underway on the European continent. More friendly market reforms should support the continued outperformance of European equity markets, which form part of our International equity overweight stance.


Perspectives

The 12-month market outlook from Luc de la Durantaye and team, provides additional insight on Europe.
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French version to follow shortly.