French election concerns to keep dragging stocks lower

The upcoming French presidential elections of 23 April and 7 May are a key concern for investors as jitters seeped further into European Markets at the end of the week.

On Friday, France’s CAC and Germany's DAX were on the back foot amid increasing concerns of potential upset from far-right National Front candidate Marine Le Pen who has gained ground in recent polls.

However, analysts said a defeat for Marine Le Pen could spell material upside for economic reform and a revival in growth.

Le Pen has narrowed the gap with her rivals recently by taking advantage of the unrest in a Paris suburb these week, with race-fuelled clashes between the public and police.

Against centrist independent Emmanuel Macron, Le Pen went from 36%-versus-64% four weeks ago to 40% this week, and against centre-right candidate François Fillon from 40%-60% then to 44%-56%.

Analysts at Berenberg said that Macron and Fillon’s lead over Le Pen in the polls is still well above the three point margin of error seen between polls before the EU referendum in the UK last June and the actual result, adding that the while “the Le Pen risk remains modest, it is not negligible”.

Felix Huefner, an economist at UBS, said that while a Le Pen victory would lead to fears of a break up of the eurozone, a victory by Macron or Fillon could be upside for economic reform and a revival in growth.

This was echoed by Berenberg which said that if centre-right reformer Fillon or the centre-left reformer Macron win the second round of the vote, France will likely head for reforms akin to those of the ‘Agenda 2010’ which turned Germany from the sick man of Europe into the continent’s major economic powerhouse about 13 years ago.

“If a rising France joins a still strong Germany at the core of Europe, the economic and political outlook for the eurozone as a whole could improve considerably. In addition, a reformer in Paris would likely agree with Berlin on some further measures to strengthen core Europe. This could enhance the cohesion of the eurozone significantly,” economists Holger Schmieding, Kallum Pickering and Florian Hense wrote on Friday.

Analysts see the big risk being a Le Pen victory, although if she does win “she would likely struggle to take more than a fifth of the seats in the parliamentary elections on 11 and 18 June, as candidates of other parties may join forces against her in many constituencies, a president Le Pen would spell the end of reform hopes for France and the EU for the next five years”.

The Berenberg economists said that if Le Pen wins a majority in parliament or finds a legal loophole to call a referendum on euro or EU membership against a parliamentary majority and then wins such a referendum against the odds, it could spell the end of Europe.

As for Huefner, he said that in contrast to Le Pen, both Macron and Fillon promise substantial reforms such as more labour-market flexibility, raising the retirement age and public-spending cuts.

“Given France's favourable demographic outlook, productivity-enhancing structural reforms would likely imply an improved longer-run growth outlook.”

Opinion polls so far have said that either Fillon or Macron will make it to the second round and beat Le Pen.

Liberal candidate François Bayrou’s decision on Wednesday to pull out of the race and endorse Macron could add at least 2.6 points for Macron and 1.6 points for Fillon.

While Socialist candidate Benoît Hamon can expect from the withdrawal of Green’s Yannick Jadot and if hard-left Jean-Luc Mélenchon endorses Hamon, Hamon may shoot up.

Berenberg said that against Hamon, Le Pen would have a better chance to win in the final round than against either Macron or Fillon.