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21.04.2017 | 13:31

UBS: French Election Watch - Round one...

With first-round voting on Sunday, opinion polls suggest that any two of four candidates could make it to the second round run off. With two candidates running on anti-establishment platforms, the stakes for the economy and markets are high.

Markets remain alert to the potential for a surprise result, as evidenced by the higher spreads of French over German government bonds. The CAC40 is also trading cautiously. In our Global Tactical Asset Allocation, we maintain a neutral position in Eurozone equities.

We are still monitoring opinion polls, the campaign trail, and gauges of market anxiety via sovereign bonds and currencies.

Our View

French voters are heading to the ballot box on Sunday, for what appears one of the most unpredictable elections in recent memory. On the eve of the first round ballot, any two of four candidates have a realistic chance of making it to the second round vote on May 7. The race is pitched as the establishment (Emmanuel Macron or François Fillon) versus the anti-establishment (Marine Le Pen or Jean-Luc Mélenchon). In our view, the most likely outcome will see an establishment candidate (most likely Macron) facing one of the anti-establishment contenders (most likely Le Pen) in the second round. Under such an outcome, we expect that Macron will become the next president of France. Assuming that Le Pen does not deliver a large upside surprise in terms of vote share, this would most likely lead to a recovery in risk appetite toward French and other European markets.

In our view, the most troubling outcome for investors from Sunday's vote would be if Le Pen and Mélenchon emerged as the first round winners. In our view, there is a low probability of this occurring, but it is possible. Both candidates offer programs for government that are likely to be negative for economic growth. Moreover, the potential for Le Pen to win the presidency will raise the question in investors' minds of France's ongoing membership in the euro and the EU. Within our Eurozone equity country strategy, we have a neutral rating on the French stock market as long as political uncertainty remains elevated. We maintain our overweight position in the euro versus the US dollar, as the single currency should benefit if either of the mainstream candidates becomes the next president of France.

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