Markets in France, Europe, and globally are rallying as they breathe a sigh of relief following the first round of the French presidential election on Sunday. The pro-business centrist candidate Emmanuel Macron came in first, beating the far-right National Front candidate, Marine Le Pen. This preliminary outcome eliminated the “existential” threat that the second round would be contested between two anti-European Union, anti-globalist extremists, Le Pen on the far right and Jean-Luc Mélenchon on the far left. Macron, who has a mainstream economic reform agenda, is the very strong favorite to win the second round of the election on May 7th, with polls showing him likely to gain more than 60% of the vote. Threats of France’s possibly leaving the euro, redenominating and devaluing the country’s debt in francs, and pulling out of the European Union (“Frexit”) no longer overhang markets.
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The French election calendar – along with its political risks – continues with the final round of the Presidential election due in two weeks. While Macron is the very likely victor, investors will look closely at the geographical pattern of the voting for clues regarding the parliamentary elections in June. Macron did not run as a candidate for one of the major parties, despite having been a minister in the former Socialist government. He will need to gain the support of the National Assembly for his growth-enhancing reforms, fiscal consolidation, and increased European political and economic integration. Socialist Party members will likely emphasize growth-stimulating measures, including Macron’s proposed 50-billion-euro investment program, while Republican Party members will likely seek public-sector expenditure cuts. And the far-right National Front may well gain enough seats to exert some influence on French policies.
The market’s relief rally on Monday was dramatic in France, with the CAC 40 stock index up 4% and French bank stocks gaining almost 10%. More broadly in Europe, the EURO STOXX 50 also gained nearly 4%. European stocks are at their highest since August 2015. The French-German sovereign spread, which had spiked before the Sunday vote, fell some 17 basis points to below 50 basis points, the lowest since late January. The reduction in political uncertainty has also caused the euro to strengthen to about $1.087. The stock market gains were augmented in Europe Tuesday, while the US market rally received a further boost from company returns, strong house sales, and the promise of substantial tax cuts.
The recent economic news for France underpins the strength of French stocks. The April Flash Purchasing Managers’ Composite Index (PMI) was 57.4, a 71-month high, up significantly from the March reading of 56.4. The Flash Manufacturing PMI is at a 72-month high. French manufacturing output rose at its fastest pace in six years. In the case of services, the dominant sector of the French economy, the Flash Services PMI reached a 71-month high. French exports have been helped by relative weakness in the euro, but that may change if this week’s gain in the euro is sustained. Nevertheless, strong consumer and investment demand should maintain the economy’s current momentum, leading to GDP growth of about 1.5% for the year, a significant advance over last year’s 1.1% advance. Growth in 2018 could be even stronger if the anticipated president-elect, Macron, is able to get the new parliament to enact a significant portion of his reform agenda.
The main French equity market ETF listed in the US is the iShares MSCI France ETF, EWQ. As of April 26, EWQ is up 7.82% over the past seven days and up 13.50% year-to-date on a total return basis. In comparison, the iShares MSCI Germany ETF, EWG, is up 12.27%; and the iShares MSCI All Countries ex US ETF, ACWX, is up 10.68, both on a total-return, year-to-date basis. As the French ETF, EWQ is not hedged against changes in the euro-US dollar exchange rate, its year-to-date advance includes about a 3.4% gain in the euro.
Looking forward, French stocks no longer look cheap. Also, political uncertainties related to the parliamentary elections in June may have some effect on markets. Nevertheless, investors now are likely to focus on the strong momentum of the French and Eurozone economies and the assurances Thursday by the European Central Bank that its highly accommodative monetary policy will continue at least through the end of this year.
