Monica Defend, Head of Global Asset Allocation Research,Pioneer Investments’

Emmanuel Macron and Marine Le Pen have won the first round of the French Presidential elections. Opinion polls are now forecasting a significant victory for Macron in the run-off, as he has already received an endorsement from two of the losing candidates – the republican Fillon and the socialist Hamon. Macron has a track record as a reformer and is a European enthusiast so this first round result is likely to be market friendly. We reiterate our constructive outlook towards risk assets, particularly European equities, but consider some safe haven assets – the 2 year Shatz in particular – to be extremely expensive and inconsistent with a reflation narrative. We continue to see the resurgence of volatility as a key risk, given the number of geopolitical challenges still at play and therefore believe investors should continue to keep hedging in place.

What is your view of the first round results of the Presidential election in France?

It was an absolutely unprecedented first round, with four contenders quite close in the polls and just one of them (not ranked among the strongest) belonging to a traditional party. This unpredictability added to the scares and fears of the market. A run-off between the first round winners, Macron and Le Pen, however, can still be thought as maintaining an element of the traditional left vs. right fight without raising the issue of representation, maintaining an element of the traditional left vs right fight to a greater extent than a different outcome may have. The risk of having a president that is explicitly disliked by a significant majority of French voters is lower.

What outcomes do you now expect for the second round?

At the moment, market can breathe a (brief) sigh of relief that the outcome of the vote was largely as expected (although an element of uncertainty will likely remain for the next two weeks ahead of the final round of voting): Emmanuel Macron (at 23.86%) and Marine Le Pen (at 21.43%) won the first round of the presidential elections; Macron has already gained the support of both Fillon (the gaullist candidate, who obtained 19.94% of the votes) and Hamon (the socialist candidate that get only 6.35% of the votes) for the second round. Melenchon (19.62%) said he will not give his support to either of the two candidates. Nonetheless, the formation of the so-called Republican Front (i.e. an alliance in the run-off election between socialists and republicans/gaullists versus Le Pen’s party) has already happened. Such an alliance has prevented any significant electoral success for the Front National (FN) in recent years and has led to a scant representation in the National Assembly for the party. In addition, it must be said that the polls were fairly accurate in predicting actual results, with the first 5 candidates in the range of 1- 1.5% from the numbers seen in the week before the elections. The same polls were suggesting that Macron will win the run-off election in two weeks’ time by a wide margin (60%-40%). In the end, it can be expected that left-to-center voters will largely choose Macron in the run-off, with only an element of center-right voters adding their support to Le Pen. This is clearly a market friendly scenario. Macron is a European enthusiast and also has a positive track record, as a minister, of being a reformer.

Do you see this result impacting on the economic outlook for Europe?

A stronger impetus in advancing the construction of Europe will surely be beneficial. We know there are still a number of things in which a stronger integration, or at least a stronger coordination, will help to take advantage of being part of a currency union (which is still partially untapped). This outcome will also have a short-term impact: stronger support for European actions coming from one of its leading countries will help shape policies and clarify objectives. This will also help confidence in general and will help push corporate investment, thereby reducing medium-term risks.

Taking a broader perspective, what is your current assessment of geopolitical risk in Europe?

The interaction between national elections and the need to reshape and reform Europe is an ongoing feature of this year; although now the Dutch election and, hopefully, also the French one seem to have cleared the potential hurdles to this process. Current polls suggest that the populist, right wing party (Alternative für Deutschland) in Germany is losing momentum, therefore it can be asserted that risks coming from the political arena are reducing. However, there is still some uncertainty related to Greece, even though a tentative political agreement was reached before Easter. What remains to be solved is political uncertainty in Italy, but this is likely to be a theme for 2018.

How can investors deal with the evolving geopolitical framework within a Multi-Asset approach?

We expect this electoral outcome to be well received by the market– bringing a relief rally in European equities and spread tightening across European peripheral bonds (including French OAT). We remain constructive on risk assets, especially equity, based on a benign growth and inflation outlook. Overall, we favour Europe and Japan, reflecting the improvements in the macroeconomic backdrop and relatively attractive valuations. We consider some safe heaven assets – the 2 year Shatz in particular – to be extremely expensive and inconsistent with a reflation narrative.

However, we continue to see the resurgence of volatility to be a key risk, given the number of geopolitical challenges still at play. Against this backdrop, we believe that investors should continue to keep hedging in place through volatility strategies, US Dollar exposure and Gold.