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French Uncertainty Lessens

28 November 2016 by Pierre Beniguel

The political landscape has always been a consideration for market investors but rarely does a change of government in an established economy change the status quo enough to alter the course of market momentum. However, recent events have forced market participants to re-assess the impact of political change, and market uncertainty has clearly been heightened as a result. This year has been dominated by the electorate demanding change, which has rocked the established political elite classes in both the UK and US. Now it is the turn of Europe. The electoral calendar is looking particularly heavy over the coming year, kicking off with the all-important primary for the French centre-right candidacy over the weekend, swiftly followed by the re-run of the second round of the Austrian presidential election and the Italian constitutional referendum both taking place on the 4th of December.

Pre-election opinion polls proved to be unreliable in both the UK referendum and US Presidential election as the so-called ‘protest vote’ defied the odds. In this regard the French primary vote followed the same pattern with Fillon surprising the pundits to overcome both former President Sarkozy and former Prime Minister Juppé. The participation was high with more than 4.3m votes cast, giving Fillon a clear majority with 66.5%, to give him strong party backing. The strong momentum of Les Republicains primary was emphasised by both main contenders acknowledging the result with Juppé announcing his retirement from national politics and Sarkozy leaving the political arena completely. During the campaign Fillon portrayed himself as a reformer and the media seem to embrace him as a candidate for change, despite the fact that he is a consummate politician and was initially elected an MP back in 1981. For the presidential election, Fillon’s success will be linked to convincing the masses that he is a true candidate for change.

In the race for the Presidency Fillon will be up against the Socialists currently run by President Holland, but the party has become disorganised under his stewardship and is now in disarray. With President Holland yet to announce if he is going to run for a second term he will already be up against a minimum of six declared contenders in the forthcoming Socialist primary in January. The left vote in the Presidential race could be diluted as another strong left-of-centre candidate, Macron, decided to break away and set up his own political party earlier this year. Divisions have cost the left-wing elections in the past and this time it seems as divided as ever; the damage it has done to itself has clearly limited its chance to even make it to the second round of the Presidential election.

As such all the indications suggest the second round of the elections will be between Fillon and Marine Le Pen of the Nationalist party. Hence, the weekend’s Les Republicains vote is seen from a market perspective to be a better outcome as Fillon seems to be in a better position to defeat Le Pen than the other candidates. His right of centre stance will be more market friendly and his recent rhetoric indicates he has been observing the protest votes and is more likely to strike a chord with middle-France (the very voters who will be looking for change). It is too early to call the French election but we view the risks attached to an anti-establishment vote to have reduced after this weekend. We maintain our stance of being part-time political analysts and remain focused on the forthcoming Italian referendum; it is virtually impossible to quantify political risk but for now at least the risk of a French shock has diminished.

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