French election; investment strategists’ reaction

Paris-France-Europe-700x450.jpgInvestment strategists have reacted positively to presidential candidate Emmanuel Macron’s first round win, which elevates him to favourite to win the second round of the election next month.

The French stock market rallied on the news, led by banks, with the CAC 40 index hitting a nine-year high, up 4.5 per cent at 5,286, marking its best level since early 2008.

The UK markets were also buoyed, with the FTSE 100 up 2 per cent to 7,257 by mid afternoon and the FTSE 250 reaching a record high, up 1.2 per cent at 19,586.

Dylan Ball, manager of the Templeton Euroland fund, says yesterday’s result suggests a recovery is now in view.

“In terms of the Templeton Euroland portfolio, this is good news for French/Euroland banks and insurers where we have a notable overweight position,” he says. “As fundamental returns in financials continue to normalise we can see a more certain path to recovery now that French political risk has been removed.”

Hartwig Kos, vice CIO and co-head of multi-asset at SYZ Asset Management, is now adopting a “pro-risk stance” in his portfolios aspolitical risks have moved more to the tail than previously expected”, albeit with some hedges remaining.

Tim Stevenson, European equities fund manager at Henderson, says European markets have been held back by political risk over the past year, but that after the German elections in September the “political risk premium” should decrease. He says this will allow investors to focus on the improving Europe ex-UK economies, improving European corporate profits and the “huge” discount European equities are trading at.

“In terms of strategy we are unlikely to change much,” Stevenson says. “Firstly we are already relatively overweight in France. We are also positioned for the gradual improvement in economic activity and earnings that we continue to see. We hold two bank positions, one insurance company and one pure fund manager name in France, so are heavily overweight in French financials. Overall we are underweight in banks but overweight in other financials.”

Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, is also bullish on European equities as the economic recovery comes to the fore.

“We expect substantial upside to European equities as attention turns towards the healthy economic recovery currently taking place in the region. Moreover, the significant valuation gap relative to US Equities make European stocks attractive, in our view, especially as the quality of the US economic recovery weakens and realisation grows that the US legislative system is likely to be a major hindrance to Trump’s fiscal bazooka.”

Wouter Sturkenboom, senior investment strategist at Russell Investments, doesn’t see the result of the French election as being a game changer.

“Beyond a small bounce in eurozone equities, the euro exchange rate and French government bonds we don’t think this is going to be a major event,” he says. “Firstly, because eurozone markets have not been overly concerned about the outcome to begin with and secondly because Macron is unlikely to be able to swiftly deliver on his political agenda. A small positive yes, a game changer no.”

All eyes will be on the ECB in 2017 as it tapers down quantitative easing from its current rate of €60bn per month, which Ball says “should be positive for the Euro and European banks, providing any ‘tantrums’ can be avoided”.

Anthony Doyle, fixed interest investment director at M&G Investments, says: “With the European economy likely to continue to improve and core inflation picking up over the course of 2017, we expect the tapering of asset purchases to be announced by the ECB in Q3, with a deposit rate hike in early 2018 and a potential refinancing rate hike to come in late 2018.

“European financial conditions will likely remain at an extremely accommodative level, with the ECB withdrawing stimulus at a very gradual pace given the high levels of public and private debt that exist within the euro area.”