The Daily Update - French - Socialist - Primary

This Sunday the French socialists head to the polls in the final round of the nomination of a socialist candidate, a runoff between Benoît Hamon who led the initial round with 36.4 percent of the vote and Manuel Valls who secured 31 percent of the vote.  Arnaud Montebourg who came third (with 17.5 percent of the vote) has urged his supporters to back Benoît Hamon.  The turnout was disappointingly low and this weekend looks unlikely to be much better signifying public disillusionment with the current government’s policies.

Among the more controversial of Hamon’s proposals is the call for a living wage of €750 per month, a reduction in the working week from 35 to 32 hours to adjust to an era of automation and robotics, taxing robots and the legalisation of cannabis.  In the 25 January TV debate, and speaking of Europe, he also said ‘we have to end this 3% deficit dogma’.  The media seems to have taken to brandishing Hamon as the ‘French Jeremy Corbyn’ with predictions suggesting he could come fifth in the first round of the Presidential election.  But Valls’ warnings that Hamon’s ‘illusory proposals’ lack credibility seems to be falling on deaf ears: Following Wednesday’s TV debate 60 percent of viewers rated Hamon as more convincing;  Valls, the former Prime Minister, is clearly being tarnished with the policy failures of the Hollande administration which he served under.

This scenario looks to be positive for the independent candidates Emmanuel Macron and Jean-Luc Mélenchon.  Macron, the former economy minister for Francois Hollande, resigned in August 2016 to set up his own centrist party has been gaining traction with his En Marche! movement.  Mélenchon has run before in the Presidential Election in 2012 having turned his back on the socialist party in 2008.  He is politically on the hard left with a ‘La France insoumise’ (Unsubmissive France) slogan and is known to be pro a review of European Treaties and ending austerity, he is also against nuclear power.  It remains to be seen whether François Bayrou, a centrist who has run in past elections, will declare and enter the race which could attract voters from the Macron and Fillon camps in particular.

An Ipsos polls poll showed that in the event that Fillon and Le Pen face each other in the final rounds of the Presidential election, 34 percent of Hamon’s supporters would vote for Fillon and 7 percent for Le Pen admittedly with 59 percent not replying.  Vall’s supporters would vote 56 percent for Fillon and 1 percent for Le Pen with 43 percent not replying.  However, that was before the right-wing Republican Presidential Candidate, François Fillon’s, campaign was hit with a scandal over allegations that €500,000 in payments from public funds went to his wife; it is not illegal to hire family members for legitimate roles but reports are questioning what work his wife did to warrant those payments.  Fillon has responded saying the claims were ‘baseless’ and he hoped to be interviewed by the investigators to ‘set out the truth’.  Nevertheless, this is likely to damage his approval ratings and does suggest this Presidential race is likely to be much more open and a close run thing.  Prior to this scandal polls had Le Pen with 26 percent support, Fillon at 25 percent and Macron at 21 percent.  But as Valls noted ‘Fillon has based his campaign on three issues: cutting 500,000 civil service jobs, cutting France’s welfare state, and his propriety,…..I think he does have something to explain.’

Clearly, political risk remains an important consideration for investing in Europe; so far this year the yield on the generic 10 year French OAT has backed up 33 basis points to yield a little over 1 percent.   While France, Germany and the Netherlands, where elections are being held this year, all tick the box as creditor nations, they fall short in in terms of our value screens for eligible credits which does at least make the risk easy to contain.