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  • Can a Macron Victory Lead to an Upswing in European Stocks?

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    Emmanuel Macron won the run-off contest this past weekend over Marine Le Pen and will become the next president of France this upcoming weekend on May 14, 2017. In so doing, at the age of 39, Macron will become the youngest president in France’s history and is a relative newcomer to the global political stage. Seen as more of a centrist candidate compared to the right leaning Le Pen, Macron is expected to maintain France’s position with the European Union and continue its use of the Euro as its currency.

    The victory was largely expected according to the pre-election polls and the actual polling results held true to form with Macron winning approximately 65% of the votes cast. Many investors were surprised on Monday when European stock prices moved slightly lower as most thought that the “status-quo” result would lead to an upswing in European stock prices. We believe this short-term behavior is more related to the widely recognized “buy the rumor, sell the news” trading philosophy than it is a referendum on the investment community’s outlook for a Macron presidency. Despite this, there is still quite a deal of uncertainty over how Macron will govern and if his policies will be supportive of future economic growth in France.

    The Macron election does remove one of the clouds lingering over the European continent in that a Le Pen victory could have led to France being the second country, behind Great Britain, to announce its intentions to leave the European Union (EU). This second departure could have been even more of a market disruption than Brexit was/is as France is currently Europe’s 3rd largest economy, behind Great Britain and Germany, and they, as opposed to Great Britain, use the Euro as its base currency. A second EU departure, coupled with the first country to abandon the Euro currency, could have led to short-term market volatility in capital markets worldwide. However, since this did not happen, a certain sense of calm has returned to the Eurozone, at least until the next scheduled election takes place or until the next country within the EU, such as one of the P.I.I.G.S. (i.e. Portugal, Italy, Ireland, Greece and Spain) countries, experiences its own, new set of financial difficulties.

    While Italy is not scheduled to go to the polls until 2018, Germany’s federal election is slated for September 2017. Incumbent Angela Merkel is running for her 4th term as chancellor but will likely face opposition from candidates in favor of Germany leaving the EU and the Euro currency. As a result, this will be a key election to follow as Germany remains as the critical cog within the overall European Union wheel. While a Merkel loss is not currently expected, should a German referendum ever result in a vote to leave the European Union, the EU would likely not survive longer term. A similar fate for the Euro could follow under such a scenario. That type of scenario would have no historical precedent and thus lend itself to an environment of great uncertainty, and likely periods of volatility, for global investors.

    We, at Hennion & Walsh, will continue to pay close attention to all of the key upcoming elections in Europe over the course of the next year. As it stands now, recognizing all of these highlighted possibilities and associated risks, international equities seem to be worthy of strong consideration for globally diversified, growth portfolios given relative valuations and economic growth prospects.

    Momentum appears to be on side of international developed market and emerging market equites vs. domestic equities thus far in 2017 as well. Consider the returns for certain geographically representative exchange-traded funds (ETFs) provided in the chart below.
    PE Ratios
    Source: Morningstar. All price returns are as of May 5, 2017. All returns for periods greater than 1 year are annualized. Past performance is not indicative of future results.

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    Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the areas discussed above. This article is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

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