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ANALYSIS: French elections – prepare for an uncertain outcome

The French presidential elections have turned into a highly unpredictable four-horse race. All four candidates offer radically different visions on the economy, and on France’s place in Europe. But is there a way to prepare for the outcome if the result is still so much up in the air?

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PA Europe

This means any scenario of a run-off that doesn’t feature Macron will lead to increased volatility over the next two weeks. The second round of the French presidential elections is scheduled for 7 May.

Don’t take a gamble

But “the sheer unpredictability of a four-horse race creates a real sense of uncertainty. As a result we believe that it may be appropriate to wait until the start of next week before adding to positions,” says Dowding. “We believe that the first round of voting is difficult to forecast accurately, whereas the second round of voting should be much more straightforward.”

Is the best advice therfore to stay put for now and wait until Monday morning before repositioning your portfolios? Well, there is one area investors could consider making changes earlier than that.

Political events tend to be reflected mainly in currency markets in the short-term (see Brexit and Trump last year). This year, the dollar has weakened somewhat against the euro, but the common currency’s gains could reverse quickly if investors are given a reason to start doubting the future of the euro again. A strong showing by Le Pen and/or Mélenchon on Sunday would certainly provide such a reason.

Investors would therefore be recommended to add some foreign currencies, dollars or perhaps even yen since the pair have had a strong negative correlation over the past year (see graph), to their portfolios, even if only to protect against ‘base currency risk’. You’d better hurry up before it’s too late.