In line with the polls, Emmanuel Macron cruised to an easy victory in the second round of the French presidential election, taking around 65% of the vote.
Macron’s party, En Marche! is also doing well in the polls for the June parliamentary elections1. Which may mean that Macron’s power to implement reforms could be bigger than initially anticipated. In fact, instead of being a source of risk, Eurozone politics might become a source of upside potential.
Current eurozone politics
The outcome of the second round of the French presidential election is an unsurprising win for Emmanuel Macron. This is the first election since the foundation of the modern French political system that neither of the two mainstream parties have made it into the run-off election of the final two. The newly minted status of Macron's En Marche! leaves an element of uncertainty about developments beyond the election. Nonetheless, the convincing nature of this victory sets Macron up well to establish a stable base in the weeks to come. This result eliminates one of the biggest political risks in the eurozone for 2017. The upcoming German elections will turn into a fight between the pro-European Chancellor Angela Merkel and the pro-pro-European Schultz, without much investment risk attached in my view.
As to the impact on French policy making, we hope that Macron’s party will also be able to win the June parliamentary election on June 11 and 18. If this happens, Macron will have an unencumbered chance to implement his proposed structural reforms that we believe are likely to be positive for both economic growth and market performance. If Macron’s party doesn’t win, he will likely need to strike a deal with Fillon’s Les Republicains, which could limit his room for maneuver.
Macron’s victory was a key watch point—in combination with the election of President Alexander van der Bellen in Austria and the pro-European House of Representatives election outcome in the Netherlands—to indicate that continental Europe seems likely to resist the rise in populism we have recently seen in the U.S. and UK. We expect the German elections on September 24 to follow that non-populist trend. We continue to believe that continental Europe’s welfare states have successfully limited the rise in inequality that is fueling populism.
Political risk-watch for the days ahead
With this turn of events, we are starting to cautiously take note of the potential for eurozone political developments to become a source of upside potential as opposed to downside risk for European equities.
We believe the key to that potential opportunity will be the Italian elections in 2018, which currently shows a dead heat between the Eurosceptic Five Star Movement and the pro-European Democratic Party (PD)2. However, on May 1, former prime minister Matteo Renzi recaptured the PD’s leadership with more than 70% of the primary vote3. If he can win the elections all the major Eurozone countries would be governed by pro-European progressives, which Russell Investments strategists believe could be a real source of upside potential for eurozone markets.
Our concern, however, is that this upside potential may also be downside potential for UK markets. French President-elect Macron has been clear in his tough stance towards the Brexit negotiations. And the recent unanimous support for the European Union’s tough negotiation stance shows that other eurozone leaders are no different in their views.4 Such a united front will likely pose a significant challenge for British Prime Minister May. It makes it more likely that a sizeable exit bill will have to be paid by the UK to leave the European Union and favouritism in trade may be very limited.
In due course market attention will turn to discussions around the German elections later this year — in our view a very low risk event. In 2018, the higher risk Italian situation will need to be resolved. For now, however, the news that Macron won the presidency is a small positive for eurozone markets, and we believe that the outcome has likely been priced in already, at least for the most part.
Focus for market-watchers will now shift toward the French parliamentary elections in June.