Dr Kamal Monnoo
Centrist candidate Emmanuel Macron has won the French election with 66% of the vote, in a resounding victory over far-right candidate Marine Le Pen. Immediate market reaction to Macron’s win was relatively muted, with the outcome having been largely expected. Although European shares briefly reached new highs, they fell back soon afterwards. Macron, France’s youngest head of state since Napoleon and a former Rothschild banker, only set up his political movement ‘En Marche!’ 13 months ago. Addressing the nation after his win, Macron pledged to “defend Europe†and “rebuild ties†between Europe and its citizens. Le Pen was in favor of France leaving the Eurozone and the euro, so the win for Macron and his pro-market and pro-Europe policies has allayed investor fears that dramatic changes could be on the horizon. Markets, especially in Europe, had previously reacted positively following Macron’s victory in the first round of the French Presidential election on April 23, when a Melenchon/ Le Pen run off was widely considered the worst-case scenario.
The fact that markets held steady following Macron’s election reflects their favorable view of his globalist and centrist policies. His policies are pro-business, aiming to reduce bureaucracy and cut costs in order to encourage companies to hire. He plans to reduce payroll taxes and tackle France’s pension system, without raising the retirement age or reducing pensions. Within Europe, in terms of what Macron’s election means for the UK, he is resolutely pro-Europe, and has stated that he will “defend the integrity†of the single market as Britain negotiates its departure from the EU. Macron has made no secret of the fact that he thinks Brexit is the wrong decision, and the UK shouldn’t be given any special treatment. He has proposed a Canadian-style trade agreement, which could dramatically restrict the UK’s market access. However, the biggest issue for Macron now is whether he will be able to gain a majority in the parliamentary election in June so that he can implement his policies.
It is only once these elections are held that we will know exactly how the new president will govern. If the En Marche! Party doesn’t achieve a parliamentary majority, Macron may seek to form a centrist, market-friendly coalition. The risk is that is that if the parliament is controlled by a party other than the president’s own party, the president may be overshadowed by a prime minister who is instead backed by the French parliament.The election of the middle ground candidate prompted the euro to jump to a six-month dollar high $1.1024 before it slipped back to $1.098. It was also up against sterling and other major currencies. The FTSE 100 Index has benefited from sterling weakness ever since Britain voted to leave the European Union in June last year. Around 70% of the companies listed on the FTSE 100 derive their earnings overseas, and so are helped by the weak pound when these earnings are converted back into sterling. For investors in Europe, this means that when sterling is weak, the pounds will buy you fewer euro-denominated investments thus denting the rating of the Sterling as a global reserve currency and more importantly of London in continuing as Europe’s financial capital.Given Macron’s victory, the consensus view is that there is now a lower level of market risk to contend with than there might have been had Le Pen won the election. Even though markets have responded positively so far, it’s important to remember that it’s impossible for anyone to accurately predict which way the FTSE 100 index, or in fact any other stock market index, or the euro will move next. It is therefore vital not to get swept away by market euphoria and instead adopt a long-term investment approach, particularly as further political uncertainty may lie ahead in the run-up to the UK election on 8 June and Germany’s federal election in September.For Pakistan the outcome of the election could not have been more favorable. With Macron in the hot seat, it means that not only France remains open for business and keen to expand global trade, but also the notion of European Union (EU) as a common market lives on. Today EU is easily Pakistan’s largest market for exports and one that offers Pakistani goods the most favorable access to its lucrative markets; recognizing Pakistan’s services and sacrifices in fighting the global war against terror. Also, France was an important supporter cum a ‘vote’ for Pakistan in originally gaining the special GSP preference granted to it and will again be crucial to its fortunes once the continuity of this preferential access comes under review next year.Le Pen was in favor of France leaving the Eurozone and the euro, so the win for Macron and his pro-market and pro-Europe policies has allayed investor fears that dramatic changes could be on the horizon. Markets, especially in Europe, had previously reacted positively following Macron’s victory in the first round of the French Presidential election on April 23, when a Melenchon/ Le Pen run off was widely considered the worst-case scenario. The fact that markets held steady following Macron’s election reflects their favorable view of his globalist and centrist policies. His policies are pro-business, aiming to reduce bureaucracy and cut costs in order to encourage companies to hire. Brexit though complicates the situation for us since the UK was also one of the chief proponents arguing Pakistan’s case for a duty-free entry of its goods in to the EU. What it essentially means is that in the coming months our Commerce and Foreign Affairs Ministries have some serious lobbying work cut out for them. They – beginning now – need to work in unison to ensure that going forward we engage both the EU and a post-Brexit UK in a way that optimizes our market interests in this very important region.
