French Election Reaches Boiling Point
The run-up to the presidential election in the United States was a spectacle. And Donald Trump made sure of it — with his heavy use of social media to ensure everyone was paying attention.
We’re just now contending with all the aftershocks from his stunning victory. From uncertainty over health care and tax reforms to skyrocketing global aggression and displays of military might.
But don’t let your preoccupation with the machinations at 1600 Pennsylvania Ave. blind you to the potential global impact of another historic election unfolding in France.
Five candidates — including two unabashed socialists — are vying for power.
May we live in interesting times, indeed!
Tune him out at your own portfolio’s peril!
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Question: Martin, we have a big one this week. France will elect a new president this weekend, and the result will likely send aftershocks through the entire global economy. Get us up to speed on what’s happening.
Martin Hutchinson: The French presidential election comes in two rounds. The first is on April 23. The second round, if no candidate secures a majority, would be on May 7. In a runoff, the two biggest winners from the first round would compete.
France has always had weak parties, but the current five-way race is extraordinary. You’ve got five candidates with a good shot of getting into the second round.
The current government of François Hollande has been in since 2012. He’s a socialist and has a poor economic record. He introduced a 75% income tax on earnings over a million euros and a 2% wealth tax in 2012, and they’ve had low growth below 1% and high unemployment. Hollande, reasonably enough, decided not to run for re-election.
Of the five candidates, two of them are socialists, one directly from Hollande’s party. Benoît Hamon is one. Then there’s Emmanuel Macron who’s normally an Independent, but he served in Hollande’s Cabinet. Macron, who’s currently running second, would like you to forget this, because he’s pretending he’s not part of the Hollande cabal.
A third candidate, Jean-Luc Mélenchon, is backed by the real left and thinks Hollande wimped out. He doesn’t just want a 75% income tax; he wants a 100% tax rate.
Then you’ve got two candidates you might want. The fourth, Marine Le Pen, is a mix of Trump and the alt-right. She’s nationalist, protectionist and anti-immigrant.
Finally, you’ve got François Fillon, the Republican. That’s the candidate you might actually want to vote for. He supports the free market. But unfortunately, he’s been surrounded by petty scandals that have almost certainly been engineered by the left.
Question: Martin, from an investment standpoint, how would the fallout from this affect the markets, and what should we expect?
Martin Hutchinson: Of the candidates, Fillon would be good news. He’s essentially a Thatcherite, in British terms. He’s the Thatcherite France needs. However, he’s pretty unlikely to make it.
Le Pen is bad news economically but would probably take France out of the euro and loosen the control of the Brussels bureaucrats, because she’d fight with them. A weaker franc and a freer market would therefore bring a boom, whatever her other policies. In a normal-sized country like France, which isn’t a behemoth like the U.S., you can always bring a boom by dropping the currency. You saw what happened in Britain after the Brexit referendum.
Of the other candidates, Macron or Mélenchon are both bad news. Macron will continue the current decline. Mélenchon would worsen it, though he might take France out of the euro and cause a small boom that way.
Hamon would be bad but hasn’t got much chance. So frankly, Faites vos jeux, messieurs et dames. (Place your bets, ladies and gentlemen.)
Question: Martin, is there a way as investors we can get ahead of what’s happening, or should we wait and see how it plays out first? What do you advise we do at this point?
Martin Hutchinson: I think we wait and see how it plays out. But I think you might want to jump pretty quickly when you know the result, or indeed if you were to get a second round with two good candidates in.
If one of the better candidates wins, you could look at one of the country funds, iShares MSCI France, which, oddly enough, is EWQ. You can alternatively look at Vinci SA, which is quoted as OTCBB: VCISY. That’s a French-based contracting company that looks to me to be an excellent infrastructure play.
It boasts 16 times trailing P/E, 2.7% yield and 15 times perspective P/E, according to the 4-Traders website. That looks to me to be a good solid play if one of the better candidates comes out ahead in France.
Question: Great insights as always, Martin. Thank you.
Martin Hutchinson: Great pleasure.
Question: This is Wall Street Daily signing off.
Senior Analyst, Wall Street Daily