1. Newsroom
  2. French Elections - Results allow markets to re-focus on earnings
Menu
Expertise 24.04.2017

French Elections - Results allow markets to re-focus on earnings

French Elections - Results allow markets to re-focus on earnings

The apparent victories by Emmanuel Macron and Marine Le Pen in the first round of the French presidential elections should bring relief to markets and allow them to focus on the ongoing strength in the underlying European economy.


With markets opening strongly following the result, we believe a strong earnings season will be key to a sustained rally in Eurozone equities. Eurozone banks appear well positioned to gain further, having most aggressively priced increased risks of Eurozone fragmentation.

  • As pre-election polls had suggested, Emmanuel Macron and Marine Le Pen appear to have qualified for the second round of French presidential elections on May 7
  • Following the June National Assembly elections, risks are rising that the ECB will begin to pivot towards a more neutral policy stance
  • This market friendly result should allow markets to focus on the impressive growth trajectory of Eurozone economies year-to-date
  • Valuations in Eurozone equities appear fair relative to their US counterparts though Eurozone banks should continue to benefit from attractive valuations, economic recovery and the prospect of a steepening Eurozone yield curve
  • The recent strength in EURUSD may prove only transitory as interest rate differentials and positioning are unsupportive

Eurozone economies show continued strength moving into 2Q2017

The first round of the French presidential elections delivered an outcome close to both pre-election polls and market expectations, reversing the trends seen during the BREXIT referendum and the US presidential election in 2016. This, combined with polls for the second round suggesting a wide lead for market-friendly Emmanuel Macron, should allow markets to focus on the ongoing economic strength seen across the single-currency area in 2017. Indeed, while US and UK economic data has shown signs of stabilising in recent weeks, data across the Eurozone suggests an economy that continues to accelerate. April purchasing manager surveys indicate little impact from electoral ‘uncertainty’ surrounding French elections among the continent’s corporates. Instead, the Eurozone economy is showing signs of ongoing acceleration in both the manufacturing and services sectors.

Inflows into European equities were rising going into the French elections

It has been this economic strength that has reversed the caution that many investors (including ourselves) began 2017 with. This was reflected in strong inflows seen into European equities in recent weeks, even ahead of the results of the first round of French elections. Although we believe that further flows into European equities are likely in the weeks ahead, investor surveys indicate that overweight positions in European equities are already nearing multi-year highs. In contrast, investors are holding the largest underweight positions in US equities since 2007. Therefore, from a flow and positioning perspective, some caution may be warranted especially given the relief rally following the French election.

Earnings upgrades are the necessary follow through to sustain the post-election rally in Eurozone equities

However, as with post-election markets in the United States following the presidential elections, we encourage investors to focus on the economic growth backdrop and the outlook for earnings on the continent looking forward.

Over the year-to-date, Eurozone equities have seen a consistent rise in earnings expectations in contrast to the weakening of expectations in the US. However, given the 6% rise in equities in the single currency area even before the post-election rally, the sustainability of the YTD rally will increasingly rely on further upgrades to current earnings expectations. Given the strong economic growth that has continued into the 2nd quarter, we expect the upcoming earnings season to deliver some surprises. Despite comparatively weaker growth trends in the United States, the US earnings season has already shown 75% of reporting companies beating expectations by an average of 6%, ahead of the 71% and 4% averages seen in earlier quarters. Moreover, with Eurozone banks having lagged behind going into the French elections, we added positions in March given the attractive valuations on offer and the prospect of earnings upgrades, especially as the ECB pivots towards more neutral policies looking ahead.

Waning political uncertainty and ongoing economic strength may result in a change in ECB policy

With uncertainty surrounding the French elections beginning to dissipate and in light of the ongoing strength in the Eurozone economy, we believe that the risk is rising of the European Central Bank beginning to pivot its accommodative policy stance to a more neutral position. This may begin as early as the summer via a shift in its communications strategy followed by communication of a ‘tapering’ of its quantitative easing programme later in 2017. Although such a move should be supportive for the singlecurrency, we believe the year-to-date strength, especially against the US dollar appears likely to overprice the pace of tapering on the part of the ECB whilst underpricing the potential for further tightening from the US Federal Reserve in the months ahead. As a result, we fear the post-election strength in EURUSD may prove to be only transitory. Indeed, with wide interest rate differentials between German and US rates and with previous short positions in EURUSD already substantially closed, we believe headwinds are now growing against further sustained strength in EURUSD.

Read more (.PDF)

LOK Michael.jpg

Michaël Lok
Group CIO and Co-CEO Asset Management

Norman Villamin-1.jpg

Norman Villamin
CIO Private Banking

GAUTRY_Patrice_UBP_72dpi-9511.jpg

Patrice Gautry 
Chief Economist

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Actualités les plus lues

Expertise 01.10.2020

Covid-19: Restez informés avec l'UBP

Depuis l’apparition du coronavirus, l’UBP accompagne et soutient ses clients dans le contexte inédit de cette crise sanitaire mondiale. La Banque vous informe régulièrement de l’adaptation de ses dispositifs aux règles de précaution fixées par les autorités et partage avec vous les dernières analyses de ses experts sur les conséquences de la pandémie pour l’économie mondiale et les marchés financiers.

Expertise 24.11.2020

Des joyaux cachés parmi les SMID Caps suisses et européennes

Les sociétés de petite et moyenne capitalisation («SMID Caps») affichent traditionnellement des taux de croissance et des rendements supérieurs sur le long terme en comparaison des grandes capitalisations. Il est en effet plus facile de générer une croissance dynamique à partir d’une plus petite structure. Par ailleurs, les SMID Caps suisses et européennes offrent généralement aux investisseurs une exposition idéale aux grandes tendances de croissance séculaires.

Expertise 17.12.2020

UBP Investment Outlook 2021

Le Meilleur des Mondes


A lire également

Expertise 11.01.2021

The distinguishing features of impact investing

Impact investing is clearly differentiated from other sustainable investment solutions, but still takes ESG criteria into account.

Expertise 05.01.2021

Social & Affordable Housing

Over 1.1 million households in England are on local authority waiting lists for affordable housing. Furthermore, it is widely expected that waiting lists will lengthen as more households will be forced to seek cheaper accommodation due to the impact of COVID-19.

Expertise 21.12.2020

China: Don’t fret over an increase in corporate bond defaults

Bond defaults were not part of the debate for much of 2020. However, these have picked up steam in Q4-20, resulting in a record level of USD 21.8 billion YTD, far exceeding the previous high of 2018.