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April 06, 2022

French Elections—An Update Ahead of the First Round

By Quentin Lafosse

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This coming Sunday, 10 April, the French people will vote in the first round of the presidential election to choose their leader for the next five years. The second round will pit the top two candidates against one another two weeks later on 24 April.

The Cards of the First Round Have Been Reshuffled

It now is very likely that we will see a run-off between Emmanuel Macron and Marine Le Pen. The campaign has been overshadowed by the war in Ukraine, which largely benefitted President Macron and his most likely challenger, Le Pen. Macron is credited with 27% of voting intentions in the first round compared to 23% for Le Pen, according to the latest polls from OpinionWay-Kéa. When we first wrote about this election in December 2021 a few candidates appeared to be in the running to secure a spot in the second round, but they have all since fallen significantly behind Le Pen.

Is the “Front Républicain” Still Alive?

When it comes to the run-off, some polls indicate that the incumbent would win by a thin margin of 53% over 47%. That is within the statistical margin of error and well below Macron’s 2017 winning share of 66%. Historically, the so-called “Front Républicain” meant that it was extremely common for candidates eliminated during the first round to call their voters to support the “all but Le Pen” candidate in the second round. Two recent elections confirmed this mechanism: In 2002, Jacques Chirac beat Jean-Marie Le Pen after non-traditional voters rallied behind Chirac. In 2017, Macron managed to unite most of the left- and right-leaning voters against Marine Le Pen. If past is prologue, Macron could benefit from this dynamic. However, the candidate field is more differentiated than in previous elections and it is doubtful that a potential anti-Le Pen alliance would extend across all contenders in the first round.

Why Is It Different This Time and How Could It Matter?

This time around the situation could be different. First, during the campaign all candidates took a very strong stance against Macron and his policies. He has been the target of every single one of his opponents, making it harder for the defeated politicians to call their supporters to vote for Macron in the run-off. Second, Marine Le Pen has changed tactics and is being viewed as more mainstream compared to her own past and her father’s political positions. This has further been helped by the fact that another contender, Eric Zemmour, has taken the role of the most extreme candidate. As a result, Le Pen could be perceived a relatively more broadly acceptable candidate than she was just five years ago and potentially receive Zemmour’s endorsement for the second round. Also, on the economic front, Le Pen’s program is more populist (and costlier) including policies that resonate across the political spectrum. Third, voter turnout will matter. A high level of abstention could invalidate polls. The recent example of the 2021 regional elections, with exceptionally low participation during the pandemic, saw both Macron and Le Pen’s parties underperform, while the more traditional Republicans party benefitted. According to recent polls, around 20% of voters are undecided about who they will support in the event of a Macron vs. Le Pen second round. Also, the second round will be held during a period of holidays, which could mean potentially less support from the middle/upper class for the mainstream candidate than indicated in polls, benefitting Le Pen.

A Tight Two-Horse Race with a Potential Negative and Asymmetric Outcome for Markets

With the war in Ukraine and other market developments such as soaring inflation or central bank normalization, the French presidential election hasn’t been at the center of investors’ attention. Moreover, Le Pen’s program in 2022 is much less economically disruptive than her 2017 ambitions. There is no immediate threat to the European project or the euro. Nonetheless, Le Pen’s election would come as a shock. The potential for protests against her nomination in the short term combined with a more difficult relationship with Brussels and other European capitals are reasons to believe that her election wouldn’t be benign. We view the road to a fully functional mandate for Le Pen to be long as she would need to secure a majority in parliament at the upcoming legislative elections in June in order to apply her program. While a newly elected president tends to also dominate legislative elections that follow, it would take quite an outperformance for Le Pen’s Rassemblement National party to gain an outright majority in parliament.

Investment Implications

Until recently, French assets have been resilient but we are now starting to see signs of nervousness reflected in wider government bond and credit spreads. There are also factors other than the upcoming vote to keep in mind, such as the phasing out of the European Central Bank’s asset purchase programs. Our view that ultimately Macron will win hasn’t changed, but the conviction level has declined somewhat. A Le Pen victory could lead to some further spread-widening of French government bonds and French corporate credit. As a result, we are currently neutral on French government bonds, having recently closed an underweight after spreads widened and we are ready to adjust our exposure should opportunities arise.

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