The investing implications of Macron’s French election win

Isabelle shares BlackRock’s key views on the final French election result, including what Emmanuel Macron’s win could mean for markets.

Pro-European former investment banker Emmanuel Macron won the final round of the French presidential election by a large margin, further reducing perceived European political risk. The BlackRock Investment Institute’s key views on the French final vote, including what it could mean for markets:

  • We could see moderate gains in risk assets, with Macron’s victory largely priced in after his first-round win.
  • Legislative elections in June will be a key yardstick of Macron’s ability to form a coalition to advance his reform agenda.
  • We are positive on European shares and see reduced political risk helping markets refocus on the region’s improving growth prospects.

Independent centrist Macron’s comfortable win of about 66% of the vote marked a rebuke of far-right Marine Le Pen’s Front National party, which ran on a nationalistic platform that included a referendum on leaving the European Union.

We expect the focus to shift to French legislative elections in June. These will be crucial for determining Macron’s ability to implement his economic program, which includes labor market reforms that would make it easier for French businesses to hire and fire. We see scope for a mild risk-on reaction to the result, which looks mostly priced in after Macron clocked a first-round victory and polls consistently showed him ahead by a large margin.

We are positive on European shares and see potential for renewed investor inflows as focus returns to the region’s improving growth. European purchasing managers’ indexes point to the strongest economic activity in six years. Europe stands to benefit from global reflation, and we see attractive valuations in cyclical shares. We are underweight European fixed income. The region’s improving economic outlook may spur higher bond yields and wider credit spreads—especially if markets sense the European Central Bank (ECB) is moving toward winding back its asset purchases.

Macron will announce on Sunday an interim government for the short period until the new National Assembly is in place in July. This government is not expected to make significant policy decisions, but appointments will be a gauge of Macron’s ability to attract high-profile names from the two major parties to form a broad-based majority.

Our base case is that Macron will need to select a compromise prime minister and cobble together a working majority with supportive members of France’s two major parties. This could lead to some watering down of his reform plans. Yet Macron’s comfortable win means we now see some chance his En Marche! movement and its formal allies could win an outright majority, enabling him to choose his prime minister and government. A lower-probability scenario we see is the Les Républicains conservative party winning a majority. The last two scenarios would allow for business-friendly reforms—and would be welcomed by markets, we believe.

The French election result confirms our view that markets until recently had overstated European political risks. Italian political risk and the country’s fragile banking system could move back into focus soon, however, particularly if the likelihood of early elections in late 2017 rises. These issues as well as Europe’s still incomplete banking and fiscal union leave fault lines that could be exposed by eventual ECB normalization—and which bring into question the longer-term sustainability of the European Monetary Union. Read more in our full BlackRock Bulletin on Macron’s win.

Isabelle Mateos y Lago is BlackRock’s Chief Multi-Asset Strategist. She is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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