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Will French Election Ever Have an Adverse Effect on Global ETFs?

Sanghamitra Saha

The French finished the first round of their key presidential election on Sunday and as per 97% polling stations reporting, Centrist Emmanuel Macron and far-right candidate Marine Le Pen are headed for a runoff election on May 7.

As of now, Macron has won 23.9% votes and 21.4% polls have gone to Le Pen’s kitty. This was however expected. Now the polls suggest that the verdict will come in favor of Macron in the final face-off.

According to the latest polling, which give a fair idea of voters' sentiments about the run-off, Macron may come ahead of Le Pen by 62% to 38%, as many political camps may now choose to be with ''anyone but Le Pen camp'', if we go by the source.

After most polls’ big-time failure in predicting the Brexit outcome and Donald Trump’s win in the U.S. election, things can turn any moment. After all, polls are not reality. Plus, the margins were very low between the parties.

Is There Any Chance of Le Pen Win?

With Le Pen showing an uncompromising attitude toward immigration and terrorism, French citizens may very well honor her agendas given the rise of terror attacks in France lately. As per Zacks analyst Ryan McQueeney, “Le Pen and Mélenchon have both campaigned on renegotiating France’s role in the EU” though for unlike reasons. In short, they were in favor of ‘Frexit’, if negotiations flop.

Now, with Mélenchon being out of the game, his acquired 19.6% votes can now go to Le Pen, if citizens take “renegotiating France’s role in the EU” seriously. This is because Melenchon said that he would not support any candidate for the second round. So, overall, another tough fight is expected in the run-off.

How Well France Economy Is?

France’s GDP grew 0.4% sequentially in the December quarter of 2016 compared with 0.2% growth in the third quarter and matched second estimates. It was the strongest growth since the March quarter. Notably, other two big Euro zone economies have also been exhibiting the same trend of improvement.

The German economy expanded a seasonally-adjusted 0.4% in the fourth quarter of 2016 versus a 0.1 percent nudge-up in the September quarter, as per tradingeconomics. Italy’s  fourth-quarter GDP growth rate was 0.2% compared with 0.3% advancement in the previous period. From this point of view, France is not that a laggard in the Euro zone.

But the jobless rate of France was steep at 10% in the fourth quarter. The government deficit of France “is worse than in Italy or Germany” as per Financial Times. The source said that the economy has to manage its deficit and debt burden.

Against this backdrop, Marine Le Pen is on a mode of "intelligent protectionism." She is against globalization and wants to lower income tax for the poorest. On the other hand, centrist Emmanuel Macron intends to lower public expenditure slowly, as per an article published on FT.com. So, citizens related to the public sector will play a major role in deciding the fate of France.

Market Impact

Whatever be the case, as of now, the market has taken cues from a lesser chance of “an anti-establishment market shock” and preparing for a relief rally. Most are betting big on centrist Emmanuel Macron (read: 3 ETFs to Watch Ahead of This Weekend's French Elections).

Assuming lower chances of Le Pen’s win, the euro surged against the U.S. dollar to its highest level since November. Equity futures also celebrated the outcome of the first round of election.

So, there will likely be a sense of optimism in the market in the coming days with iShares MSCI France ETF EWQ, CurrencyShares Euro Trust FXE, iShares MSCI Eurozone ETF EZU, all-world ETF iShares MSCI ACWI ACWI and key U.S. ETF SPDR S&P 500 ETF SPY expected to perform decently (read: Join Eurozone Rally with These ETFs).

And even if Le pen comes across as a winner, volatility ETF iPath S&P 500 VIX ST Futures ETN VXX would gain an upper hand just for a short while, in our opinion. A fear-induced sell-off will likely make European investments (which seem pretty lucrative right now), and some global investments (given the uptick in emerging market fundamentals) more compelling over the long term (read: Can Emerging Market ETFs Retain Their Mojo in 2017?).     

On the U.S. front, things are likely to de driven by Trump and the Fed, not powered by Le Pen or Macron. After all, one should not forget that in two of most-feared occasions of 2016 – Brexit and Trump win – global stock markets pay little heed to the threat, and rebounded massively after an initial dive.