Investors leave Marine Le Pen presidency unhedged
Source: FT | Friday, 6 January 2017
Markets are overstating the risks associated with the upcoming French presidential election and the chances of a victory by Marine Le Pen, the Eurosceptic far-right candidate, say a number of Europe’s leading fund managers.
The president of France’s Front National, the nationalist party that has a strong anti-immigration agenda, has promised a referendum on French membership of the EU if she is elected in May. This outcome would have profound political and economic ramifications for Europe.
But Ms Le Pen is expected to pick up only 35 per cent of the vote in the final round in a head-to-head contest against François Fillon, the conservative candidate of the centre-right Republican party and her most likely opponent.
Despite heightened awareness of the rise of populism and unexpected political risks, several fund managers say the possibility of a Le Pen win is remote, and not worth factoring into their investment decisions.
James de Bunsen, a fund manager at Henderson Global Investors, the UK-listed investment company, believes commentators have wrongly assumed that Donald Trump’s win in the US presidential election and the UK vote for Brexit in June mean the French are more likely to vote for Ms Le Pen.
“It is a weird and misconceived theory. The French electorate will not take inspiration [from the UK and the US] because they feel there is some type of populist uprising,” he says.
A hedge fund manager investing in European assets, who asked to remain anonymous, agrees the odds of a Le Pen victory are small. “Le Pen is a tail risk — and not a very large one,” he says.
Le Pen is a tail risk — and not a very large one
As such, portfolio managers have taken limited action to hedge the French election risk.
Significant uncertainties around cyclical growth trends, the probable policy actions of Mr Trump once he takes office in January, and the implications for the Italian banking system of the country’s recent referendum outcome are more likely to drive investment decisions over the next quarter.
“We are not seeing anything put in place yet [to hedge the French election],” says Lukas Daalder, chief investment officer at Robeco Investment Solutions, the Dutch asset manager.
“[The election] is being discussed [with clients]. The most logical change would be to adjust their foreign exchange [exposure]. People are much more aware of the risks [of an unexpected outcome in the election]. But at the same time, for most people, this is still pretty far [away].”
Valentijn van Nieuwenhuijzen, head of the multi-asset business at NN Investment Partners, the Dutch fund company with €200bn of assets, adds that any hedges in currencies or rates will not be put in place until the final two to four weeks before the French election in April.
If we hedge, it will be much closer to the time. We need to get through the first hundred days of Trump first
Valentijn van Nieuwenhuijzen, NN Investment Partners
“If we hedge, it will be much closer to the time. It will not be the cornerstone of any investment strategy until then. Cyclical drivers and the central banks will be much more important. We need to get through the first hundred days of Trump first,” he says.
But a win for Ms Le Pen could have extreme consequences. This is particularly true if her victory forms part of a broader populist movement encompassing the Netherlands, where there are elections in March; or Italy, where early elections could be called in the first three months of the year.
Pollsters are predicting that Geert Wilders, the Dutch anti-Islam politician, and his rightwing Party for Freedom, or PVV, will win the 2017 general election.
A small contingent of political risk and asset management experts warn that investors should not be complacent.
“Were [Ms Le Pen] to win, it is highly unlikely either the euro or indeed the EU could survive in their current form. That will carry downstream risks for the likes of Italy, Portugal and Greece too,” says Mujtaba Rahman, a managing director at Eurasia Group, a consultancy that provides political risk analysis for investors.
“There is definitely a real and growing sense — also among Japanese and US investment communities — that the 2017 political and electoral calendar in Europe presents a problem that needs to be thought through well ahead of time.”
Bookmakers suggest Mr Fillon has a 62 per cent likelihood of winning the French election, compared with just 27 per cent for Ms Le Pen.
Six months before the US presidential elections, however, Mr Trump was given only a 28 per cent chance of winning the election, while his adversary, Hillary Clinton, was given odds of 69 per cent, according to Betfair, the gambling website.
A senior analyst at a large European hedge fund company, speaking on condition of anonymity, says: “Investors need to think through the implications of holding assets in France. Sophisticated investors should have a break-up scenario [worked out by] now.
“[Financial] instruments will be instantly transformed [if the euro area breaks up]. Government bonds and stocks will need to be redenominated and a revaluation will have to take place overnight.”
How would a win for Marine Le Pen in the presidential elections affect the eurozone’s economy?
Eurozone economists surveyed by the FT last month generally agreed that a win for Ms Le Pen would have a negative effect on the eurozone’s economy. They cited uncertainty over the future of the EU as an important concern.
According to the latest survey of 173 fund managers by Bank of America Merrill Lynch, investors are underweight eurozone equities for the first time in five months, holding a net 1 per cent underweight position on average in December, down from a net 4 per cent overweight position in November.
French equity funds, a bellwether for confidence in the domestic stock market, have suffered $2.3bn of outflows from investors since the start of the year, according to EPFR, the data provider.
These redemptions are already 28 per cent higher than they were for the whole of 2015, putting French equity funds on course for their eighth consecutive year of outflows.
Instead, investors have moved into Japanese and US stock markets. This reflects rising optimism towards US equity valuations since Mr Trump’s win in November, and increased pessimism towards Europe after Matteo Renzi, the Italian prime minister, lost a referendum in early December.
“It is hard to see what will make people pile back [into European equities],” says Mr de Bunsen. “2017 is a year that is going to be defined by elections in Europe. Investors are taking notice that unexpected things can happen.”
Marine Le Pen is part of a political dynasty in the making. She is the daughter of Jean-Marie Le Pen, from whom she took over the leadership of the Front National in 2011. Her niece Marion joined the party aged 18 and became a member of parliament by the time she was 22.
Aged 48, Ms Le Pen has been a member of the European Parliament for the National Front since 2004, first for the Île-de-France constituency, which includes Paris, and then for the North-West France constituency.
The party is known for its anti-immigration stance, but Ms Le Pen has moved it away from the anti-semitism of her father, who founded the National Front in 1972. He was denounced by Ms Le Pen and subsequently ejected from the party in 2015 after restating historic comments characterising Nazi gas chambers as a “detail” of history.
She has blamed mass immigration for radicalisation in France, criticising successive governments for “20 years of mistakes” on immigration policy, and has argued for at least a temporary stop to immigration — legal and illegal.
Ms Le Pen’s other policies have borrowed from both the left and the right of the political spectrum.
Like Mr Trump, she has targeted blue-collar voters and those who feel they have lost out from globalisation, advocating protectionist measures including the introduction of tariffs.
But she has also supported a larger state, defending public services, civil servants and farmers. These groups stand to lose out under French presidential contender François Fillon’s programme of privatisation and spending cuts.
Aside from immigration, her flagship policy is to roll back the euro. Leaving would mean a fall in the French currency and a boost to exports, she has said.
She also favours a renegotiation of France’s role in the EU with Brussels — if not outright “Frexit” — and supports closer relations between France and Russia, arguing that Russia is critical to defeating Isis in the Middle East.