Macron Wins French Election
By Florence Tan, Tae Hyon Ahn, Celestee Tan
Emmanuel Macron, an independent pro-European centrist will become the new president of France. In round two of the May 7 French Presidential election Macron received around 65% of the vote to National Front leader Marine Le Pen's (35%). Macron's strong performance exceeds forecasts but still shows that the National Front has again grown significantly as a political force. Macron will take office by May 14.
Macron's win, as well as the victories of mainstream parties in the Dutch and potentially German elections reinforce Citi analysts' base case for relatively benign outcomes in European elections this year.
Investors have been warming up to European equities as expectations of a Macron win rose. In the week following round one of the election, European equity funds reported their largest inflows since late 2015. The euro also hit a six-month high leading into round two of the election on the weekend.
An anti-EU government is likely to come into power in Italy next year.
Equities: In addition to reduced fears that political instability will derail Europe's recovery, improving economic growth may also support European equities. Business optimism is high and employment in the services sector has increased for 13 consecutive months. A more stable political backdrop, an improving economy and attractive valuations could further increase the appeal of European equities.
Bonds: On the other hand, current low bond yields and prospects of tighter monetary policy in the eurozone next year have led Citi analysts to be more selective within European investment grade corporate and high yield bonds.
Euro: With the euro hitting a six-month high leading up to the election, Citi analysts believe that there could be limited upside post Macron's win and investors may want to take some profits.
- Investors should note that challenges remain for France and Europe. Given that the fragmentation of the political landscape implies that the 577 seats of the lower house will be shared by five main political movements, Macron may not obtain an outright majority in parliament, which can affect his ability to bring about reforms in France.
- An anti-EU government is likely to come into power in Italy next year although Citi analysts believe that Italy's electoral system can help reduce the risks of extreme outcomes.
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