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Two candidates remain after the first round of the French presidential elections: Emmanuel Macron (En Marche) and Marine Le Pen (Front National). We think Macron is very likely to emerge as the overall winner on 7 May. His reformist, pro-European programme should have a positive impact on the French and European economies, which were already showing robust signs of improvement in recent months, further justifying our decision to overweight shares.
France – and, by extension, Europe – was gripped on Sunday by the first round of the presidential elections. As expected, it turned into a tense electoral battle, from which the independent candidate Emmanuel Macron (23.8%) and the far-right candidate Marine Le Pen (21.7%) made it through to the run-off. The candidates of the two traditional parties, the Parti Socialiste and Les Republicains, were defeated, together with the surprisingly strong far-left challenger, Jean-Luc Mélenchon.
The French people will now return to the polling stations on 7 May to choose between the two remaining contenders. We can expect a fortnight of intense debate, although Macron currently seems best positioned to become president. He won the first round, showing that he has built up a solid base of electoral support, and he is also likely to pick up substantial numbers of voters from the eliminated candidates. Quite a few prominent figures in the two traditional parties have already advised their supporters to vote for Macron, while others have called explicitly for Le Pen’s Front National to be opposed. A ‘republican front’ of this kind helped Jacques Chirac win a resounding victory (80% to 20%) in 2002 against Marine Le Pen’s father, Jean-Marie. Although a similarly wide margin is less likely this time, the polls currently suggest a substantial lead (roughly 20%) for Macron over Le Pen in the second round.
Parliamentary elections will then follow in early June. The traditional parties are likely to perform better on that occasion, which means the future president will need to secure cross-party support in parliament. A glance at the two candidates’ manifestos suggests that only the reformist Macron is capable of doing this.
Macron’s programme could not be further from Le Pen’s: Marine Le Pen’s manifesto plots a nationalist course with economic protectionism and a referendum on a possible French exit from the EU and the euro.
Macron, by contrast, is calling for greater European cooperation and has a liberal programme, including a reduction in taxes on business, less centralised pay negotiation and possibilities for longer working hours. All this could benefit the French economy, which was already showing marked signs of improvement in recent months. His pro-European programme is likewise good news for European cooperation and for the European economy.
The financial markets have been reassured by this result, as illustrated by their immediate reaction: the euro has appreciated sharply, rate spreads with the safe haven of Germany have narrowed, and the share markets breathed a sigh of relief and opened sharply higher.
2017 was always going to be a key election year in the euro area given the jitters triggered by 2016’s Brexit vote and the election of President Trump. Yesterday’s result suggested once again, however, that those nerves were exaggerated. We have been concentrating for several months now on the improved economic growth prospects: business and consumer confidence alike point towards accelerating economic growth in virtually every region. Central bank support also continues to ensure a favourable investment climate, and we likewise expect corporate earnings to pick up strongly. Despite the various risks, which we will continue to track, the balance sheet is looking positive. We therefore endorse our further step in the direction of equities and are sticking to our overweighting.
Within our equity selection, we prefer businesses from the euro area: not only are the political risks continuing to ebb away, there are also the favourable economic prospects, the ECB’s policy of stimulation and a noteworthy increase in corporate earnings. We are particularly drawn to the German stock market and to family businesses. We are complementing these with the more defensive high dividend theme and with health care as a defensive growth sector. Lastly, we have also increased our holding of Asian shares. These too offer an attractive valuation, an improving economic outlook and a robust recovery in corporate earnings.
We are not adjusting our bond strategy either. We are protecting ourselves by keeping the duration low via short maturities and firmly underweighting traditional government paper, which is vulnerable. Emerging markets like Poland and India remain important, but we prefer the broader ‘high-yield bonds’ theme, in which we also include safer currencies like the Norwegian krone and the US dollar.
(*) The investment strategy described in this document relates to all investment funds (undertakings for collective investment) managed by KBC Asset Management NV, which make explicit reference in their investment policy, as laid out in the prospectus, to KBC Asset Management’s investment strategy. The stated strategy is not, therefore, altered in the case of other investment funds, the investment policy of which does not refer directly to KBC Asset Management’s investment strategy. It is possible that these investment funds are managed in a way that differs from the investment strategy. You should always read the prospectus and the Key Investor Information Document for the relevant investment fund.
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