* A ray of hope
The election of Emmanuel Macron as President of France (with 66% of votes vs Marine Le Pen’s
34% in the second round) is a ray of hope for the financial markets. It greatly reduces political risk
in the short term. Over the coming years it could pave the way for another major step towards
Eurozone integration. On the domestic front, the hope is that we will see the implementation of
long-awaited structural reforms needed to put the economy on a firmer footing.
* Many challenges ahead
Mr Macron has his work cut out for him. It is far from a given that he will be able to command a
stable majority after the upcoming legislative elections (11 and 18 June). He is the least popular
President-elect in recent decades and the French electorate has become increasingly fragmented.
Many of his ambitious reforms will likely meet resistance. If Mr Macron fails to implement them, the
odds of a Eurosceptic emerging to become President in the next election could rise significantly.
* Modest positive for European markets
It’s now time to stop obsessing about French politics. While a Macron victory (or to be precise, the
avoidance of a Le Pen victory) was substantially priced in following the first round, the confirmation
of this outcome is likely to provide a modest tailwind for the equity market. We continue to see a
good basis for Eurozone outperformance on the better fundamentals of valuation, earnings outlook
and macro momentum.
* Sectors and Stocks: Stay Domestic
In the context of further outperformance from Europe, we continue to favour domestic exposure in
cyclical, financial and defensive areas, especially given fairly muted outperformance since the first
round. In sector terms, Travel & Leisure has been a notable underperformer since the first round,
and among our Eurozone top picks list, Randstad (like its staffer peer Adecco) has lagged behind.
Industrials, in contrast to commodities, have fared well – we exercise caution here.