Carmignac: In these French elections, the third round will also count

April 14, 2022

By Kevin Thozet, Member of Carmignac's Investment Committee

While all eyes are on April 24th and the outcome of the second round of the French presidential election, the outcome of the June legislative elections should also be crucial for the conduct of the country and therefore for financial markets.

Since the results of the first round of the presidential election, renewed optimism, or rather some form of relief, has overtaken investors in the hope of a repeat of 2017 on April 24. In the aftermath of last Sunday’s results, the OAT-Bund spread fell back below 50bp, the Euro appreciated by 1% against the dollar and the CAC 40 outperformed its European peers.

However, beyond the second round, what is at stake for France and financial markets also lies with the legislative elections scheduled for June.

In recent weeks, as voting intentions in favor of Marine Le Pen increased in the polls, investors were worried that the far-right candidate would become President of France. But the better than expected score achieved by Emmanuel Macron on Sunday, while Ms. Le Pen's came in line with pollsters predictions, has fueled the prospect of a re-election of the current tenant of the Elysée Palace, whose program is considered more orthodox on the economic and political front.

However, such a probability could be overestimated. While almost all the polls predict a win for Mr. Macron in the second round, the gap between the two candidates is edging close to the margin of error and (more or less) recent history has shown that their reliability can be challenged. In addition, unlike in 2017, Ms. Le Pen has a significant potential pool of voters.

Second, the current context seems very different and much more uncertain than the one that prevailed five years ago. Hasn't the tactical voting already been widely expressed? Will a 'Republican front' emerge? In this context, the transfer of votes from both the left and the right of the 'La République en Marche' candidate is far from certain and the level of abstention remains the great unknown of this election.

The president presides, the government governs... normally

Given the small gap between the two candidates in recent polls, the debate which takes place between the two ballots, scheduled for April 20th, is of particular importance. It had already marked a major turning point in voting intentions in 2017 with a drop in those in favor of the candidate of the 'Rassemblement National' after her performance.

It is reasonable to think that Ms. Le Pen will be better prepared this time unlike, potentially, Mr. Macron who has had fewer opportunities to debate recently. As such it is reasonable to expect a rematch, rather than a remake.

Beyond the second round of the presidential election, the legislative elections which are meant to be held in three months’ time will be key. In France, although he though he is appointed by the President of the Republic, the Prime Minister is the head of the government responsible for determining and conducting the Nation's policy and he usually comes from a political party belonging to the majority in the National Assembly.

Whoever is elected on April 24th, he or she will not be able to implement his or her intended political program without a parliamentary majority.

Currently, Emmanuel Macron's party, 'La République en Marche', does not appear as being able to rely on a strong political platform - as evidenced by their low scores in recent regional and local elections. If elected, Mr. Macron may have to deal with a coalition government, which would limit his ability to reform the country, and notably his controversial pension reform.

If so, his weak domestic base could also hamper his ability to take initiatives at European level.

As for Marine Le Pen, if she is elected head of State, there is a significant probability of her being confronted by a 'Republican front' which will likely be more united than it is these days. She would then certainly have to cohabit with a government largely opposed to her.

What are the consequences for the financial markets?

Regardless of the results on April 24th, a rise in French interest rates in the medium term is to be expected. However, the time horizon and the magnitude of such a rise could vary.

Indeed, the election of Mr. Macron should initially lead to a tightening of spreads before a rise in French interest rates supported by the pro-growth policy of the current President and more optimistic market sentiment. A victory by Mrs. Le Pen would lead to higher rates, but due to increased uncertainty, a shock to confidence and growing deficits.

On currency markets, more than the growth dynamic, her desire for a Europe of Nations opposed to the inclination towards more federalism should determine the short-term trajectory of the Euro.

As for equity markets, generally political elections are far from being the main driver of returns, which tend to be largely driven by global factors (be it interest rates and inflation dynamics, the impact of the expected Chinese stimulus, declining economic growth, etc.).

Finally, with regard to non-listed assets, while Mr. Macron tends to be associated with the revival of private equity in France, Ms. Le Pen may also favor the development of new start-ups as she intends to implement income tax exemption for active young people and corporate tax exemption for young entrepreneurs, under 30.

While the result of the second round of the presidential election will obviously be important, the legislative elections of June 12th and 19th will also be crucial for the future of the country and consequently for Europe. Therefore, once April 24th is over, investors should certainly and very quickly follow very closely this 'third round' of the French presidential election.

Candidates' programs

Emmanuel Macron intends to support purchasing power and firms’ competitiveness thanks to Pension reforms and state modernization. Marine Le Pen intends to push for massive spending for pensions and household purchasing power. While neither program is fiscally balanced, the implementation of Ms. Le Pen's program would see France's deficit increase further (3.5% in 2022 and an estimated 7% of GDP by 2027).

The other important difference lies with their respective positions on the European front. Mr. Macron advocates more European integration. As for Ms. Le Pen, while 'Frexit' have apparently been ruled out, the candidate of the 'Rassemblement National' wants to limit the movement of people, which seems hardly compatible with the current framework of the European internal market.