What to expect from the French Presidential Election
Euroscepticism and populism are on the rise following Britain’s Brexit vote and Donald Trump’s Presidential Election victory last year. The next key electoral battleground is France, where campaigning has officially begun ahead of the country’s highly anticipated Presidential Election.
The rise in support for anti-EU, far-right National Front leader Marine Le Pen has concerned investors, since Le Pen has pledged to hold a referendum on the country’s future within the European Union and the Euro. Le Pen has continued to come out on top in a host of recent opinion polls and we’ve seen renewed pressure on the Euro in the past few weeks (Figure 1) as the market braces for the possibility that the National Front candidate could conceivably be named as the country’s next President in May.
Figure 1: EUR/USD & Euro Trade Weighted Index (April ’16 - April ’17)
Source: Thomson Reuters Datastream Date: 12/04/2017
Which candidates are in the running?
Jean-Luc Mélenchon [Unsubmissive France]
Support for far-left ‘Unsubmissive France’ leader Jean-Luc Mélenchon has grown in the past few weeks. Mélenchon has gone from rank outsider to credible candidate in the last few days, helped in part by a strong showing in the latest TV debate where he came out on top of the snap poll. Just like Le Pen, Mélenchon has also called for a referendum on EU membership.
Odds of winning (Oddschecker): 10/1 (9%)
Emmanuel Macron [En Marche!]
Centrist and former Economic Minister Emmanuel Macron has become the unexpected frontrunner in this year’s election. Macron’s bid to become President began in earnest last year when he separated from Francois Hollande’s Socialist Party and established his own movement, En Marche! His plans to cut taxes and ramp up public infrastructure spending have seen him gain in the polls where he has surged around ten percentage points in the past four months alone. His inexperience in politics and ties to large businesses, including IB Rothschild, may count against him.
Odds of winning: 4/5 (55%)
François Fillon [Les Républicains]
Conservative François Fillon has suffered from a tumultuous few months during the election campaign. Plagued by a raft of allegations, Fillon has fallen from clear frontrunner to a fairly distant third place in a matter of weeks. In January, satirical newspaper Canard Enchaine published the first of two exposes alleging that Fillon had placed his Welsh-born wife and two of their children on the public payroll by creating fictions jobs, earning the family nearly 900,000 Euros before taxes.
Odds of winning: 4/1 (20%)
Marine Le Pen [Front National]
The possibility of far-right National Front leader Marine Le Pen winning the French Presidential Election has gone from unthinkable to plausible in the past few months. Le Pen looks very likely to make it through to the second round of voting and should she win the election, has pledged to hold a referendum on the country’s membership with the EU and Euro. Needless to say, a “Frexit” referendum in the second largest Eurozone economy would call into serious question the long term sustainability of the currency bloc.
Odds of winning: 11/4 (27%)
Who is ahead in the latest opinion polls?
Unlike the systems adopted by the vast majority of the rest of Europe, the President of France is elected via a two-round voting system. 11 candidates will be in the first round of voting on Sunday 23rd April and if none of the candidates win a majority share, which is a certainty, then the two with the most votes will go head-to-head in a run-off election on 7th May.
The recent polls for the first round of voting have remained remarkably tight. Le Pen and Macron have been neck-and-neck for a number of months and both, at present, look likely to be the two names to make it through to the run-off election next month. A poll of polls since the beginning of April has Le Pen marginally ahead at 24.2% to 23.9%, with Fillon and Mélenchon in the chasing pack at 18.7% and 17.1% respectively (Figure 2).
Figure 2: French Presidential Election First Round Polls (Feb ’17 - April ’17)
Source: Bloomberg Date: 12/04/2017
While Le Pen is expected to make it through as one of the top two candidates in the first round, she is currently comfortably short of both Macron and Fillon in the second round polls. The latest poll from LeMonde/Cevipof has Macron defeating Le Pen by 61% to 39% in the second round.
It’s worth noting that almost 40% of voters are still undecided with a matter of days to go before polling day. While this dials up the unpredictability of the final vote, it could potentially play into Le Pen’s hands. Moreover, an estimated five million fewer votes are expected to be cast this year than in the last election in 2012, further good news for Le Pen given populist candidates have a historical precedent of performing well when turnout is low.
Figure 3: PreditIt French Presidential Election Odds (Jan ‘17 - April ’17)
Source: Bloomberg Date: 11/04/2017
How have the markets reacted?
So far the French Presidential Election risk appears to be more heavily priced into the bond market than the foreign exchange market. The spread between 10 year government bonds in Germany and France remains elevated, having risen to its highest level in 5 years in the past few weeks. This spread measures the greater level of risk in holding French assets than identical ones in Germany (Figure 4).
Figure 4: France/Germany Bond Yield Spread (2014 - 2017)
Source: Thomson Reuters Datastream Date: 12/04/2017
So far we think currency markets are mostly discounting the possibility of a Le Pen victory, particularly following the resounding defeat of anti-EU PVV leader Geert Wilders in the recent Dutch Election. The currency market reaction has been fairly limited, even following the spate of recent terrorist attacks in the UK and Sweden, which would generally lead to a rally in support for anti-immigration candidates. So far we’ve not seen a significant movement either way in EUR/USD that has been driven by anything other than the diverging monetary policy stances between the European Central Bank and the Federal Reserve.
In the event of a shock victory for Marine Le Pen, we’d therefore expect a sharp sell-off in the Euro against every major currency following the announcement. This would accelerate our expectations for the single currency to reach parity with the US Dollar at some point later in the year. We would also expect investors to flock away from riskier emerging market assets, and into the safe-haven currencies, namely the Japanese Yen and Swiss Franc.
We remain comfortable with our call that Le Pen will fall comfortably short in the second round vote, and we’re likely to see a short term relief rally in the Euro should this be the case. Polls can make mistakes, as they did in the case of Brexit and the US Presidential elections, but they rarely are off by more than twenty points.
A bigger risk is the possibility of a Melenchon-Le Pen face off in the second round. The recent surge in the polls of the far-left candidate put him almost within the margin of error of ending in second place. While polls also have Mélenchon comfortably ahead of Le Pen in the second round, his victory would put the European status quo in serious jeopardy. While the central scenario remains for Macron to win the presidency, we think the small but real risk posed by a Mélenchon victory is not sufficiently priced in by the common currency.