The election of Emmanuel Macron as President of France marks an important shift in the narrative around European politics: not all popular discontent in Europe can be channelled as anti-EU or purely nationalistic.
For investors, the importance of Macron’s victory may be more about what has been rejected than it is about any distinct shift in the direction of French politics. It is certainly good news for political supporters of the European project as his programme focusses on a deeper integration and better cooperation between the various countries in the Union. Furthermore, a strong believer in free trade and globalisation, the new French president will aim to benefit from those trends rather than fight to reverse them. However, we’ll have to wait until the elections to the National Assembly in June to determine the extent to which this represents a tangible change in the direction of French economic policy.
Perhaps more important in the near-term is the possibility that a disruption to the ‘euro-fragmentation’ narrative should encourage investors to focus more on improving fundamental data across the region. The economic backdrop in France has improved significantly in recent years, as indeed it has across the euro region. This has been apparent not only in rising growth and falling unemployment rates but also, more recently, in significant upside surprises to market expectations for company earnings and sales during the opening period of 2017.
A simplistic eyeballing of cyclically adjusted valuations for European equity markets suggests attractive valuations relative to history. This is because investors don’t believe the future will look like the past.
Macron’s victory in itself will likely not be enough for these value signals to revert to prior levels (and generate the substantial investment returns that come with this), but a perception that some risks have been removed, combined with evidence that a “cycle” worthy of the name is at least a possibility would be a useful start. Moreover the potential for these influences to have a positive impact on peripheral eurozone sovereign bonds, as Maria discussed last month, could create a more positive environment for corporations.
Recent experience has shown the near futility of obsessing about election results. Election outcomes themselves can be unpredictable, but more importantly, both near term price responses and long term economic impacts are even more unknowable.