The French presidential election is shaping up to be a bit of an odyssey with all manner of surprises and it is yet to even get to the first round of voting. A week or so ago Emmanuel Macron looked like having the best chance at facing Marine Le Pen in the second round run-off in May after François Fillon’s polling took a hit from the Penelope-gate scandal. Then, there was the story that the left candidates Benoît Hamon and Jean-Luc Mélenchon were exploring an alliance with a single candidate to represent the left but this failed leaving both facing the prospect of elimination in the first round based on their current polling-scores. But in politics a lot can change in a week.
Emmanuel Macron’s ratings have come under pressure; an ill-considered comment suggesting that French colonial rule in Algeria was akin to a ‘crime against humanity’ was said to show his political inexperience, after all at 39 years of age he is one of the youngest candidates to run in the Presidential election. According to an Elabe poll on Tuesday 21 February, François Fillon started gaining ground again getting 21% support whereas Macron suffered a 5% fall in the polls to 18.5%.
In the next chapter to this epic: yesterday, François Bayrou, the Mayor of Pau, announced he had offered Emmanuel Macron an alliance. He said that an ‘exceptional response’ was needed as the country was at ‘extreme risk’ but was clear that this is ‘alliance’ and not a subjugation of the centrist agenda. Bayrou has contested the Presidential election running in 2002, 2007 and 2012 but in this election had chosen to initially support the candidacy of Alain Juppé, who ended up losing to Fillon in the Right’s primaries. Clearly, this considerably strengthens Macron’s hand: with Bayrou’s 5-6% support an alliance with Macron could well secure enough votes to win the initial round of voting and face Marine Le Pen in the second round.
Marine Le Pen still leads the first round polls with 28% support ahead of the Bayrou announcement. But polls suggest in the second round run-off she would lose to either Fillon or Macron who would take 56 percent and 59 percent of the vote respectively. However, it could become close as Le Pen has been gaining momentum: the election is very open at this stage increasing investor nervousness.
Ahead of the Bayrou announcement the yield on the 10 year OAT had risen to ~1.09 percent to trade above the Irish 10 year at 1.06 percent. Just to hammer home the point France is rated Aa2/AA by Moody’s/Fitch and Ireland is rated A3/A. The market’s reaction to Bayrou forming an alliance with Macron is perceived as de-risking the situation somewhat and the OAT 10 year yield is trading below 1 percent at the time of writing. However, we suspect that this odyssey is far from over. Macron is running as an independent with a newly created En Marche movement that has no seats in the current parliament although he has said he will field candidates in all constituencies. If he is elected further uncertainty is likely to remain as it is unclear how effectively his administration will be without a political majority. Bayrou’s Democratic Movement only controls 2 seats out of a total of 577 in the current parliament. In France the parliamentary election follows a Presidential election and is due in June. A Fillon Presidency has the potential to offer more stability in the sense he would have the backing of the Republican party in parliament. But there is still scope for the polls to swing again as the election debates start and Macron will need to give more details on his policies.
What is clear is that political risk is, and is likely to remain, a key factor driving European bond markets. For us, this has been an easy risk to avoid; despite their poor start to the year performance-wise we still struggle to find European credits that screen attractively on our valuation models or that offer a better alternative to the US dollar denominated issues we already own.