Macron and the bullish case for French stocks
This is the most surreal French election of my adult life. Hollande, Sarkozy, Juppé and Valls are all out, rejected in their party primaries. The center right is gravely wounded with Fillon’s scandal. The Socialist candidate Benoit Hamon has been crippled by Hollande’s dismal tenure in the Élysée Palace. So the destiny of France will once be decided on May 7 when Emmanuel Macron faces Marine Le Pen of the National Front in the second round of the Presidential election. If he succeeds, France will have its first 39-year old head of state since poor, doomed Citoyen Louis Capet, once Le Roi Louis XVI.
Emmanuel Macron, former Banque Rothschild director, colleague of Raphael de Ricaud and former patron of Baron Yves as President Hollande’s Economy Minister, will beat Marine in a landslide on May 7. He will be hailed as the French Obama, a candidate for change his path to the Élysée forged by a coalition of the disillusioned in the center right and the non-loony fringe of the Socialist Party. A brilliant technocrat without the usual incestuous roots in the French political elite, Macron can even grab votes from the conservative, Conservative French right, the heirs to the Gaullist and the Catholic Vendée boucage country of La France profonde. This means donning the mantle of the disgraced Fillon as a French economic reformer, a Thatcher, a Tony Blair, a Third Way pragmatist. Macron stunned the world when he called French colonialism in Algeria “a crime against humanity”. This will cost him few pied noir votes as their offspring vote for the National Front, whose lineal ancestors in the Third Republic preferred Adolf Hitler to Leon Blum.
Yet Macron’s Algeria comments attracts millions of young, leftist, Magrebi and progressive voters who will be mission critical to his victory on May 7. He may even win over the Juppé wing of the Republican center-right to his cause. It is also no coincidence that the most brutal phase of the Algerian war was waged by Socialist governments in the 1950’s, a direct blow to Benoit Hamon. As in 2002 under Chirac, the French political elite will gang up to vanquish the National Front in the second round. This is the assumption behind my bullish thesis on French equities in 2017.
The real problems for Macron begins after he becomes the next President of France. France could be in violation of the Maastricht three per cent budget deficit limit at the same time as the EU will be traumatized by the Article 50 talks with the British. French public finance, a chronic, recurrent (even existential) problem for successive governments since the time in office of Grand Vizier Jacques Necker, is almost 100 per centof GDP. The world bond market (and Brussels) will not tolerate unilateral French reflation at a time German electorate gives its verdict on Chancellor Merkel’s decade in power. Yet French growth has lagged Germany because of its sclerotic labor market, its statist political establishment since the time of Colbert (Jean Baptiste, not Stephen!) and its protected “national champion” industries.
Longer term, French demographics are far better than Germany or Italy. France’s financial elite (now in London or DIFC) or tech elite (in Silicon Valley) is world class. Deregulation and pension reform will create an economic renaissance, as Macron rightly argues.
Frexit? No chance though foreign investors own two third of the French government bond (OAT) market and will go into a panic attack if the National Front cruises up in the first round in April, as it will. French political risk will peak on the eve of 7 May. That will be the precise time to go long the ten year French OAT — German Bund bond spread. As there is zero Frexit risk under Macron (au contraire!), this will be the times to accumulate French megabanks BNP Paribas and Société Générale. Only one fourth of French equities are owned by offshore funds. This will change once Macron moves into the Élysée Palace. So the widening of the French OAS — German Bund ten year bond spread to 0.75 per cent (France is a Club Med country — literally!) means squat. This is a “phoney war”, not a full blown 2010 style sovereign crisis. Goldman Sachs gives Le Pen 28 per cent chance of winning on May 7. I give her zero per cent. Buy French equities on any sell off.