When we polled Europe’s fund selectors some weeks ago, it seemed they were already anticipating a Macron victory in France’s presidential elections. Macro(n)economic sentiment has shot up since our previous poll in December, with the consensus outlook switching from neutral to decidedly positive. In every European country, apart from one (read on to find out which one. The answer won’t surprise you…), at least half of fund buyers now have a positive macro(n)economic outlook.
Overall sentiment has reached its highest level in two years, in a sign there was very little concern about a populist victory in the French elections that could have spelled the break-up of the EU. Markets were confident that French voters would follow the example set by Dutch voters in March by firmly rejecting the destructive form of populism propagated by Marin Le Pen.
And that’s exactly what happened. With the Damocles sword of a disorderly disintegration of Europe now removed, the political risk premium on equities and (peripheral and corporate) bonds has arguably been drastically reduced. Over the past two weeks, markets have already gradually priced this in, with bonds spreads narrowing and equity prices edging higher.
But for investor macro(n) optimism to be sustained, the new French president will eventually have to deliver the ambitious reforms he has promised. However, Macron is unlikely to gain a majority in parliament, as his predecessors Sarkozy and Hollande enjoyed. However, even despite this luxury, they both failed to accomplish much. It’s therefore warranted to say Macron is facing a formidable challenge at home.
The Franco-German axis
Europe is therefore the area where Macron could really make a difference, and that even could ‘save’ his presidency in case his domestic reform agenda stalls. Macron will invest significant political capital improving political cooperation in Europe. His relationship with Berlin, where his first foreign visit will be headed, will be key.
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