A win for Emmanuel Macron in the French presidential election on Sunday would cement confidence in Europe’s economic recovery and boost appetite for European and Asian equities, argue portfolio managers.
But some feel that a victory for the centrist candidate over National Front leader Marine Le Pen has already been largely priced in, with polls suggesting that some 60% of voters support Macron. (Still, AsianInvestor yesterday assessed the implications of a win for Le Pen.)
Paul O’Connor, head of multi-asset at Henderson Global Investors in London, said: “If we see a big Macron victory, there will be a big rotation into European equities.”
Investors’ anxieties about the election have prevented many from allocating to the region at a time when underlying data points to global economic growth, an environment that usually favours Europe, he added. European stocks have a cyclical character, tending to perform well as global bond yields move higher, as they have in recent months, said O’Connor.
“The political risk [presented by the chance of a Le Pen victory] has impeded what would be a natural flow towards Europe, given these global fundamentals,” he said. “A Macron victory would extinguish this big tail risk.”
By mid-April, the average earnings-per-share growth forecast for companies in the MSCI World equity index for 2017 was 12.5% year-on-year, according to Datastream. At the same time last year, the equivalent growth forecast for 2016 was 1.7%.
O’Connor is positioned to reflect his broadly optimistic view on the global economy, he said, with strong global equity allocations, and particular tilts to Europe – a position he has been building steadily over the last 18 months – as well as smaller positions in Japan and emerging markets.
Asian stock implications
“A Macron victory will provide investors with a confidence boost,” agreed Jeffrey Tan, Hong Kong-based Asia investment director at Belgian insurance firm Ageas.
It would remove much of the anxiety about European markets, which has driven investors elsewhere, including to Asian equities, said Tan. “In the mid-term, the effect will be investor flows coming back into Europe, as investors will be convinced of the resilience of the European recovery.”
Moreover, both Tan and O’Connor said investors would be unlikely to fund European positions by redeeming Asian assets in the event of a Macron victory, because risk appetite would rise following the vote.
John Woods, Asia-Pacific chief investment officer at Credit Suisse, agreed that Macron winning would remove the threat of Le Pen and thus boost appetite for Asian equities.
“From a technical perspective, most global investors are still underweight Asian risk assets," he added. "We are likely to see a period of consolidation [buying]” in the coming year, he said.
Woods is overweight Asian equities and predicts earnings growth for companies in the MSCI Asia ex-Japan index of 15% to 18% this year.
O’Connor said the chief Asian beneficiaries of a Macron victory would be cyclical markets attuned to global growth and commodity prices – notably Japan, South Korea and Taiwan. Those likely to suffer are the more defensive, less cyclical assets, such as credit and equity sectors like healthcare, utilities, pharmaceuticals and tobacco, he noted.
Macron win priced in?
All that said, the immediate impact of a Macron win is likely to be minimal, suggested Ali Miremadi, London-based investment director at fund house GAM
While such an outcome would be “an excuse to re-allocate to Europe”, he said, European stock investors have already largely priced in Macron taking office. Following his victory in the first round, the MSCI world jumped 1.5%, France’s CAC 40 index gained 4.1% and the EuroStoxx 600 rose 2.1%.
As a result, a win for far-right candidate Marine Le Pen would be “a very negative shock” for equity valuations, likely worse than the impact of the Brexit vote last June, said Miremadi.
He is heavily overweight European stocks and heavily underweight US equities, which he believes have become overvalued after significant recent gains, with the S&P 500 frequently breaking new record highs in recent months.
Indeed, Miremadi argued that investor concerns that US stocks are overvalued would be more influential for global equities than the outcome of the French election.
Valuations, rather than trade policy, represent the most important factor when it comes to the US and investor behaviour, he said. In particular, it is far too early to infer that free trade will suffer from a Donald Trump presidency, he said.
“It is a big mistake to assume that Trump will be bad, say, for Chinese exporters,” noted Miremadi. “There’s just not the grounds for such a statement.”
Many will be hoping he is right.