French Presidential Election: Macron and Le Pen through to the 2nd Round

The results of the first round of the French Presidential Election indicate that Emmanuel Macron and Marine Le Pen will proceed to round two on May 7th. With neither candidate likely to be able to form a majority in parliament, investors may not want to be too carried away by optimism over Macron's potential reforms or by fears over Le Pen's divisive policies. Investors are better off focusing on the improving fundamentals in the Eurozone instead. 

Macron vs. Le Pen

Citi analysts, in line with earlier polls, maintain their view that mainstream candidate Macron may likely win the French Presidential election. In case of Le Pen’s victory, although it is not Citi’s base case, this would raise investor risk aversion and cause risk assets to sell-off.

According to Citi's analysts, Le Pen would need to convince more than 80% of the undecided voters in order to beat Macron. Given Macron's pro-EU and pro-business bias, European equities and bonds are expected to rally, along with the euro following a Macron win. That said, surprises remain possible in this unusual electoral campaign.

Look beyond politics and focus on fundamentals

Citi analysts see little equity market risk from forthcoming elections in the UK and Germany and this result helps to pave the way to strong European equity returns to end-2017, with support from earnings growth (10%+) and further re-rating. Citi introduces a mid-2018 Stoxx target of 430, which suggests 15-20% total returns from current levels.

Fundamentals also suggest that European equities are attractively valued and the improving European economy is likely to boost earnings. Last week's flash euro zone composite PMI (purchasing managers' index) reading for April showed that business activity in the euro area hit a fresh six-year high at 56.7. Activity in France outperformed Germany as businesses grew more positive about their future.

While Citi analysts are underweight European equities due to political concerns, the allocation to Europe ranges between 8 to 12% across Citi's diversified model portfolios. Investors with zero or little holdings in European equities can consider adding some exposure gradually.

Key takeaways:

• The results of the first round of the French Presidential Election indicate that Emmanuel Macron and Marine Le Pen will proceed to round two on May 7th. Investors are expected to greet this outcome with relief.

• Neither Macron or Le Pen is expected to be able to form a majority in Parliament during the Legislative elections on June 10 and 18. This will make it challenging for them to carry out their agendas.

• Fundamentals, and not misplaced fear or optimism will drive markets in the medium term. For now, the fundamentals suggest that European equities are attractively valued and the improving European economy is likely to boost earnings. Investors with zero or little holdings in European equities can consider adding some exposure gradually.