08 February 2017
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Asset managers are still confident on the outcome of the French presidential election next May.
In his latest note, Alberto Gallo, portfolio manager of the Algebris Macro Credit Fund and head of Macro Strategies, with macro analysts Tao Pan and Aditya Aney, has given 1% chance to the election of far-right candidate Marine Le Pen as next French president.
However, Gallo assessed the Front National’s leader will make it to the second round at 99%. Former minister of Economy Emmanuel Macron, who launched his own political movement En Marche! a few months ago after leaving the government and right-wing primary winner François Fillon for Les Républicains are the most likely to face Le Pen in the second round at 58% and 42% respectively, according to Algebris’ expectations.
“Despite Le Pen’s near certainty of winning in the first round, our model suggests that she stands a very low chance of beating either Macron or Fillon in the second round, even after correcting for potential polling biases to favour her.
“While Le Pen may continue to rise in the polls against Fillon if the latter’s scandal worsens, it seems increasingly likely that the battle will be between Le Pen and Macron. This is positive as Macron has been enjoying a significant and growing lead over Le Pen in polls,” noted Algebris’s head of Macro Strategies Gallo.
For Markus Schomer, chief economist at PineBridge Investments, Fillon’s scandal and drop in polls remains concerning. He said it opens the door for a left-of-center candidate to run against Marine Le Pen, giving her the best chance of winning.
But Schomer’s view echoes that of Gallo. Le Pen will not win against Fillon or Macron in the second round of the election, even with a margin of error for Brexit/Trump style ‘shy voters’ he added.
PineBridge’s chief economist warned however that if the challenger is Parti Socialiste’s candidate Benoit Hamon, for whom Algebris’ Gallo gives 0.3% chance to attend the second round, Le Pen has a real chance of becoming France’s next president.
In the event of Le Pen’s victory, Schomer predicts a nightmarish future for Europe.
“The EU will plunge into a deep crisis similar to and probably worse than 2008. There will be a direct opposition to Germany, threatening the axis of power behind European integration in the past 60 years. If a large country like France tried to exit the euro and reintroduce a new currency, the inevitable economic crisis would engulf all of Europe and likely the rest of the world.
Both Gallo and Schomer exclude the option of far-left candidate Jean-Luc Melenchon passing the first round of the election late April.
Reforms
Also they agree on France’s need for reforms.
Schomer estimates challenges for Macron or Fillon such as the lack of competitiveness and government spending restrictions could only be addressed with a rigorous economic reform program.
“The good news is France is not starting from a particularly bad spot. The World Economic Forum’s Global Competitiveness Index ranks France 21st out of 138 countries. That’s not a good as the Netherlands and Germany at #4 and #5, but about on par with the next group of eurozone economies such as Austria, Ireland and Luxembourg, and well ahead of Spain and Italy.
“That’s why a new administration with the courage to implement economic reforms to reduce the stubbornly high unemployment rate could be a very positive development not just for France, but also the entire eurozone,” he argued.
Algebris’ Gallo observed both Macron and Fillon support domestic reforms and want more, not less European integration.
“A potential victory of Mr Macron over Le Pen, combined with the re-election of Angela Merkel in Germany, would create a strong pro-reform FrancoGerman coalition. At that point, the EU could finally build stronger ties,” he said.
Gallo highlighted a Macron-Merkel scenario would be very positive, contrary to current market expectations. According to him, it would also mean that Britain’s bargaining power in Brexit negotiations would fall considerably, leaving the EU to focus on its own issues
As for the Netherlands, Algebris assessed that even if Geert Wilders wins, he may have limited control on parliament.
