With a little over a fortnight until the first round of voting in the French presidential elections, David Zahn offers his assessment of how markets might react to the success of various candidates
Despite the failure of the anti-immigration, anti-European Union (EU) party to make significant inroads in the recent Dutch elections, it would be unwise to discount completely the influence of populism in upcoming European elections.
There are certainly many similarities between Marine Le Pen's National Front in France and Geert Wilders' Party for Freedom in the Netherlands. In the wake of Wilders's loss in the Dutch elections, however - which markets broadly welcomed - investors should remain wary of the sort of complacency that was prevalent around the UK's Brexit vote and the US presidential election.
Our base-case scenario is for Le Pen and the centrist-independent candidate Emmanuel Macron to make it through the first round on 23 April, and then face each other in the run-off on 7 May. While we are not in the business of making political predictions, we then believe Macron will likely take the presidency.
While we recognise there is a possibility Le Pen could win in the second round of voting in May, we do think it is a low one. And even if Le Pen fails to capitalise on her polling strength, we foresee populism continuing to dominate European political discourse for some years to come.
If Macron does indeed find himself facing Le Pen in the second round and emerges victorious, a rally in French government bonds seems likely to us, at least in the short term.
Longer term, however, a Macron victory could be negative for the French bond markets because at present his policies are unclear and seem set to do little to address two major economic concerns - France's high debt-to- GDP ratio and high current account deficit.
That said, we would expect a more immediate negative market reaction should Le Pen prove victorious in the second-round of voting.
Should Le Pen win, we anticipate a likely bear market in French government bonds. Le Pen has been vocal about her plans to host a referendum on France's EU membership. While it remains to be seen whether she could achieve this, we would expect to see markets start to discount the probability of France leaving, and this would likely lead to increased volatility in French bonds.
An even more remote possibility at this stage would appear to be a victory for the centre-right candidate Francois Fillon, whose campaign has been beset by accusations of wrongdoing.
If Fillon were to succeed, however, this could potentially prove positive for French bonds. In our view, Fillon is the only candidate really suggesting they would tackle key issues in France's economy. Pledging to shrink the size of the state and tackle the debt and deficit issues head on, we would consider him to be the true reformer out of the three main candidates.
One important point to consider is that a decisive victory for Le Pen in the first round of voting does not necessarily make her the favourite in the run-off. Equally, though, if she fails to secure the presidency, we do not expect this to spell the end of the influence either of Le Pen herself or the supporters of her populist views.
David Zahn is head of European fixed income at Franklin Templeton
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