As expected, Emmanuel Macron prevailed in the second and final round of the French presidential election on Sunday. His victory over Marine Le Pen is expected to spark a relief rally in global equity markets, particularly in Europe, and remove much of the uncertainty that has hung over investors during the election season.
The new president, a pro-Europe centrist who has pledged to initiate a program of structural reforms that should support French economic growth as well as greater integration with the European Union (EU), was elected by a wide margin among the general electorate. The magnitude of his victory was significant given the pre-election concerns about the rise of global populism and the implications a victory by his opponent would have had on the sustainability of the EU should France attempt a Brexit-like break from the group.
Results Expected to Calm Equity Markets
The immediate impact of the Macron victory is expected to be a “relief rally,” wherein global markets in general—and French and European stocks in particular—rally as investors put aside recent uncertainty and return to concentrating on market fundamentals. Investors have been cautious amid the recent uncertainty and concerned about the possibility that a populist, anti-Europe movement could force a referendum to leave the EU, much like the Brexit campaign in the U.K. last year. Thus, the electorate’s choice for Macron’s pro-Europe, pro-reform agenda bodes well for continuity in the EU as well as the initiation of the structural reforms necessary to support France’s economic and budgetary improvement.
Time to Refocus on Fundamentals
The lifting of the uncertainty that has acted as a headwind on European equities during the French election campaign should allow investors to turn their attention back to market fundamentals and to refocus on the earnings recovery ongoing in Europe. Corporate earnings have been improving globally after multiple quarters of earnings recession, and growth in Europe has been outpacing that of the U.S. We are seeing earnings growth broadening across more sectors, countries, and geographic regions. Under usual market conditions (absent of exogenous political conditions affecting performance), stock price performance closely follows earnings performance. We believe such a return to market fundamentals should help stocks as companies are rewarded for positive earnings news, regardless of extraneous political headlines.
Upcoming Parliamentary Elections
Likely to Reinforce Support for Macron and Reform
The next step in the French election process is parliamentary elections scheduled for mid-June. The result of this vote is crucial in that the makeup of the parliament will likely determine how successful Macron can be in enacting his political agenda. A majority held by like-minded legislators of the new president’s own party greatly increases the chances of implementing the political, fiscal, and economic reforms outlined during Macron’s campaign run. Without control of the majority of government, either party would be hard-pressed to see its political initiatives realized.
Removal of Uncertainty Allows ECB
to Get Back to Business
A byproduct of the Macron victory is that it will give the European Central Bank (ECB) more freedom to act as the European recovery strengthens. The central bank has been operating under the same uncertainty that has kept individual investors cautious during the election season. Removal of this uncertainty and attendant volatility gives the ECB more latitude to take the steps necessary to manage strategy. The bank should be able to concentrate on when and how to taper the asset purchase and quantitative easing programs that have been in effect and which have helped spur the economic growth the eurozone is now experiencing. The exact path the ECB follows will go a long way toward determining how the region’s recovery progresses over the next few quarters.
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The opinions expressed are those of Laura Granger and are no guarantee of the future performance of any American Century Investments portfolio. For educational use only. This information is not intended to serve as investment advice.