April 24, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

The first round of the French elections put an end to the suspense which lasted several months. The opinion polls had projected a close-run score and, remarkably, for once accurately predicted the result. The second round runoff will therefore see Emmanuel Macron against Marine Le Pen. Electors are facing a simple choice. They will either be voting to remain within the fold of democratic nations, through a social-liberal programme compatible with the functioning of a globalised and connected planet, or on the other hand, they will be choosing the unknown territory of a presidency characterised by inciting extreme solutions and an economic programme with no future. Although the opinion polls are currently indicating a clear lead for Emmanuel Macron, there are nonetheless two weeks between the two rounds of voting and the transfer of votes may not be quite so straight-forward, given the first-round scores. As has often been the case, the second round of the French election will amount to a “non-choice”. Whereas first-round voting traditionally reflects a conviction-based vote, electors are confronted instead with a choice between the worst candidate, and the least-appealing one who is closest to their opinions. The legislative elections on 11 and 18 June are the next major event on the horizon, as a parliamentary majority is required to govern France.

Initially, investors will express their relief at having avoided a second round runoff between Marine Le Pen and Jean-Luc Mélenchon. Investors may even reinvest in European equity markets immediately, particularly France, if the opinion polls continue to confirm the clear lead enjoyed by the “reasonable” candidate. The incumbent administration is therefore ending as it began, with a record level of unpopularity under the fifth republic since President Pompidou. As the champion of public expenditure, which is dependent on debt, incapable of decreasing the unemployment rate after three years of growth and bogged down in a social model dating from the three post-war decades, which defies all mathematical laws when it comes to financing the pay-as-you go retirement pensions regime, France has so far been incapable of capitalising on the economic recovery in the eurozone to undertake reforms. Neither has it managed to seize on the enormous opportunities provided by interest rates being maintained at artificially low levels, since the ECB slammed the door on Germanic monetary orthodoxy.

Given France’s multitude of advantages, including its culture, its smaller business and major companies, its infrastructures, demographic structure, climate and geographical positioning, it now has a fresh (or last?) chance to join the other major developed and emerging countries and rekindle (and re-enthuse) the European project and therefore avoid its inevitable decline after a millennium of such rich history.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in April 24th, 2017.

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The first round of the French elections put an end to the suspense which lasted several months. The opinion polls had projected a close-run score and, remarkably, for once accurately predicted the result. The second round runoff will therefore see Emmanuel Macron against Marine Le Pen. Electors are facing a simple choice. They will either be...
2017-04-24