What Analysts Are Saying About Macron’s VictoryBy
ECB may shift its balance of risks to neutral: Evercore ISI
Watch Republican Party before June parliament vote: Barclays
The following are selected comments from analysts on the implications for financial markets and economic policies from the French presidential election Sunday.
Centrist candidate Emmanuel Macron won a wider victory over the far-right Marine Le Pen than polls had projected, with the latest vote tally suggesting a 66 percent to 34 percent result.
Krishna Guha, vice chairman of Evercore ISI in Washington:
- “This will allow investors to focus on the euro zone’s increasingly solid expansion, relatively attractive valuations” and “risk-friendly central bank,” he wrote.
- “Today’s big personal mandate should help Macron’s efforts to promote his En Marche! candidates and peel off members of established political formations, but there remains a good chance that he will have to ‘cohabit’ with a center-right majority in the Assembly; this could still be productive.”
- “The Macron win all but guarantees that the ECB will move to a neutral balance of risks to growth and drop its easing bias on rates in June -- symbolic steps that would mark the end of the easing cycle -- but we still believe the Governing Council will delay the big policy decision on QE to September.”
BlackRock Investment Institute analysts:
- “We are positive on European shares, and see the reduction of political risk helping investors to refocus on the region’s improving growth prospects.”
- “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.”
UBS Group AG chief investment office analysts, including Dean Turner:
- “As a minister in the previous government he was at the cutting edge of institutional resistance to change that has hampered reform efforts in the past, and this seems to have given him the steely determination to break the cycle. The focus of his immediate efforts are likely to be reforms to the labor market, taxation (including reducing corporate taxation from 33% to 25%), and making the public sector more efficient.”
- “We expect the ECB to adjust its forward guidance in June, as we don’t see the U.K. elections on June 8 as a downside risk for the ECB. In September, the ECB should then announce its plans to wind down quantitative easing (QE), starting in January 2018.”
- “A Macron presidency should be supportive for the euro and help EURUSD and EURCHF to stay on their appreciation trends, which should lead to 1.20 in EURUSD and 1.16 in EURCHF over the next 12 months,” they wrote, referring to euro-dollar and euro-franc exchange rates.
Francois Cabau and Philippe Gudin, economists at Barclays Plc in London and Paris:
- “The fragmentation of the political landscape implies that the 577 seats of the lower house will be shared by five main political movements.”
- Initial polls “suggest that the likelihood of a hung parliament is high, but President-elect Macron may be able to gather a governing majority (possibly an absolute majority or grand coalition), which we believe would enable him to implement his reform agenda to a large extent. It will be key to monitor the split within the Republican Party over the next few weeks.”
- “Based on declarations by supporters of President-elect, his initial main priorities concern the simplification of the labor code, and of business procedures, a comprehensive reform of education and vocational training, cleaning up moral standards in the political sphere, and the launch of discussions with other member states aimed at reforming Europe, with a focus on euro area integration.”
Vincent Chaigneau, Ciaran O’Hagan and Marc-Henri Thoumin, rates strategists at Societe General in London and Paris:
- “There will be a little extra zest in OATs into the inauguration (most likely May 14), followed by the formation of a government. That will be followed by a string of decrees or new legislative proposals before the general elections. This ‘honeymoon’ period should help convince any remaining shorts to cover, even at this late stage in the risk rally.” Note that French government bonds are often referred to as OATs.
- “We prefer to overweight even higher-yielding credits than OATs now, notably bonos, and more so in the long end,” they wrote, referring to Spanish government bonds. They added that they favor “underweighting BTPs,” or Italian government bonds.
Daniele Antonucci and Matthew Pennill, European economists at Morgan Stanley in London:
- “Macronomics begins. The tail risk of ‘Frexit’ is avoided, but a possibly fragmented parliament and a program of moderate reform suggest that the French economy may only be set for gradual change.”
- “The market seems to have assumed a fragmented parliament. Even though this is possible, and probably likely, the only recent poll shows that Macron’s party may do well, just like he did better than expected on the preliminary vote counting. We remain cautious, though, as these polls have drawbacks.”
- “The market also seems aware that a fragmented parliament may limit the prospects for change. What it seems less aware of is that it’s Macron’s agenda itself that consists of incremental, rather than radical domestic reforms, while it may be overambitious in the near term when it comes to the vision for the monetary union.”
David Hussey, head of European equities at Manulife Asset Management in London:
- “Macron promises to introduce economic reform and modernize the French economy -- just like many of his predecessors. But I believe there is a more-than-fair chance that he will not ultimately have the mandate or power to do that. If history repeats itself, little will change in reality.”
- “Political risk will remain around the Western democracies until the wages and jobs situation improve. And this will translate into persistent uncertainty and volatility for the markets.”
- Even so, “investor interest in Europe equities will likely rise -- where free cashflow yields can appear attractive relative to their peers and economic momentum could see margins as well as earnings expand in 2017 and beyond.”
Sean Darby and fellow equity strategists at Jefferies Inc. in Hong Kong:
- “We remain bullish on France within our global asset allocation. The French equity index trades on a forward PE of 15.2 times, a forward PB of 1.53 times, a forward dividend yield of 3.2% and a forward ROE of 10.1%.” PE refers to the price-to-equity ratio and PB is price-to-book, while ROE is return on equity.
Alberto Gallo, portfolio manager at Algebris Investments in London:
- "Europe is at a turning point. Investors have overestimated eurozone break-up risk for a long time, in our view."
- After the French and Dutch elections so far this year, "Europe is proving to be more resilient to populism than Anglo-American economies, perhaps thanks to its stronger social stability and lower inequality, as we argued earlier. Growth and inflation are also surprising to the upside. This, in our view, will continue to lift European cyclical equities, bond yields and the euro as well as compressing spreads in credit."
- "After so many gyrations, unloved Greek debt may likely offer more value to investors than supposed safe-haven U.K. gilts."