Your 401(k) has a bundle riding on French election
Wall Street pros say U.S. investors’ portfolios could be jolted
French voters head to the polls Sunday for Round 1 of their presidential election. If you don’t care who wins, think again, because the results could affect your 401(k).
Here’s why. Elections that upend the political status quo and inject uncertainty into global markets can cause large swings in prices of stocks, bonds and other investments.
And that’s just what this election threatens to do.
Look at last June’s Brexit vote, which pollsters and investors did not expect. British voters’ decision to leave the European Union sent the Dow Jones industrial average spiraling down almost 900 points, or nearly 5%, in just two days. Similarly, Donald Trump’s upset win over Hillary Clinton on Election Day in November knocked the Dow down 800 points in futures trading that night. Both victories were fueled by a populist revolt against perceived inequalities in how wealth and jobs filter through a global economy.
Those sizable stock declines proved short-lived. Professional investors determined the worst-case economic scenarios were unlikely to play out. The Dow recouped its Brexit losses 10 trading days after the vote. It rose 515 points in the first three days after President Trump was elected.
The Dow could also be roiled by Sunday’s French vote, which is too close to call with the four leading candidates within a few percentage points of one another in polls. Just how turbulent it gets will depend on which two candidates make it to next month’s final round, investment pros say. The top two vote-getters will vie for the French presidency in a final vote May 7.
Sunday’s vote, which is likely to be close, could upend the political status quo and inject anxiety into global markets
‘NIGHTMARE’ SCENARIO
The biggest market fear — which Citigroup dubbed the “nightmare scenario” in a recent report for its clients — is that the two candidates who are perceived as threats to growth and financial stability — Marine Le Pen and Jean-Luc Melenchon — make it out of the first round of voting. That pits them against each other in the final round and means one of them would become France’s next president.
“It has the potential to cause shockwaves in the market,” Daniel Christen, an economist at U.K.-based Capital Economics, warned in a client note.
These two candidates are labeled “euro-skeptics” by professional investors, with populist leanings from the far right and far left.
The far-right candidate, Le Pen, wants to pull France out of the EU. A polarizing critic of globalization, she is pushing to limit immigration into the country. The far-left hopeful, Melenchon, wants to renegotiate France’s treaties with the EU. He also favors policies investors claim could slow growth and push the country’s debt higher, such as increasing public spending, boosting the minimum wage and lowering the retirement age for workers.
If they both advance, something which is seen as a low probability but still possible, it could harm both the French and European economies, triggering a drop in the U.S. stock market, said Geoffrey Pazzanese, a senior portfolio manager in Federated Investors international equities group.
Investors likely would react by getting rid of riskier investments in their portfolios, which will drive stock prices lower — at least in the short term, he said.
Companies in the Standard & Poor’s 500 stock index that benefit from a strong global economy would see an “immediate sell-off,” on Monday, Pazzanese said. Commodities such as oil would also fall.
Investors in search of safety would probably flock to havens such as U.S. government bonds and the dollar. U.S. investors who own shares of American multinationals should also prepare for turbulence, as the euro is likely to fall if the final-round election winner is either Le Pen or Melenchon, said Luca Paolini, chief strategist at U.K.-based Pictet Asset Management. A weaker euro would make U.S.made products sold in Europe more expensive.
Thursday’s terror attack in Paris adds to the uncertainty.
COMFORTABLE SCENARIO
Paolini said investors are more comfortable if one candidate who is viewed as pro-Europe, and who favors staying in the single-market EU, advances.
Emmanuel Macron, an exbanker and France’s former minister of the economy, is the current front-runner and one of the two preferred candidates in the eyes of investors, given his business-friendly and pro-EU stance. The other candidate, Francois Fillon, has free-market views that also have been well-received.
The one caveat, however, is that if either Le Pen or Melenchon captures upwards of 30% of the votes in Round 1, it would suggest the candidate has a real chance of becoming president in the final round, Paolini said.
BULLISH SCENARIO
The most bullish outcome in the first round of voting for investors is if both Macron and Fillon move on to the final round.
Not only would that rule out an extreme candidate winning, it would also send a message that the populist wave is losing its momentum, Paolini said.
Stocks and other investments deemed risky, such as commodities, would probably rally. And bond markets, especially those in Europe, would avoid falling.