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May 09, 2017

Macron's In, What's Next?

Emmanuel Macron made history on Sunday, May 7th, becoming the youngest president of France. We discuss our investment position leading up to the French elections and what we're looking at next.

Ric provides leadership to the research team, oversees all mandates at CWB McLean & Partners, and is the portfolio manager for the firm’s International, Fixed Income and asset allocation strategies.

Another historical milestone has been achieved! Emmanuel Macron won the French presidential race on Sunday, May 7th and became France’s youngest president. He defeated far-rightist Marine Le Pen, who would likely have brought tremendous volatility, uncertainty, and downside to risk assets in the market.

In our Quarterly Outlook Commentary released to our clients, we wrote about the impact on the markets leading up to the French elections and how we positioned our international pool for this. Here’s a very simplistic and high level recap: 

Investors pulled out of Europe fearing another "surprise victory" akin to Brexit and Trump - despite an improving European PMI. 

The possibility of a National Front candidate (Le Pen) sweeping to power has clearly spooked many global investors, making it difficult for investors to take a positive position on the region. Eurozone equities have seen significant outflows heading into the elections despite the improving economic prospects as shown by the EU Manufacturing Purchase Manager’s Index (PMI) reading (Figure 1).

Figure 1:

EU Manufacturing Purchase Manager’s Index (PMI) chart

Source: Citigroup

CWB M&P Senior Research Analyst, Edward Friedman, articulated it well when he spoke at the last round of our Outlook luncheons. “We are global investors and as such we face election risks periodically. Last June we had Brexit, in November (the) US elections, in March there were elections in the Netherlands, this month France, Britain in June, in September Germany will vote and Italy is currently at risk of going into an election. We can’t be constantly spooked by potentially unfavourable results…”

As fundamental investors, it’s critical that we look beyond the headlines and speculation. We can’t predict the outcome of such events, nor should we base our investment decisions on outcomes that are unknown. What we can do is ensure that our portfolios are positioned to withstand either circumstance – thereby mitigating risk for our clients. Focusing on valuation and probabilities, we felt that France was being unfairly punished.

Diversification is an "overused" word - but it works. 


Our belief that there is value in the European markets is reflected in our international pool. Our international pool allocation has its heaviest weight in Europe (60%) (Figure 2). 17% of our international holdings are in France.

Figure 2: CWB McLean & Partners International Equity Pool Asset Allocation

CWB McLean & Partners International Equity Pool Asset Allocation pie chart

With the uncertainty regarding the outcome of the French elections, we executed on a ”French barbell” strategy. That is to say, we divided the 17% allocation of French companies into two broad categories; companies which will potentially benefit from a Le Pen victory, and companies which will benefit from a Macron victory. We had net exporter companies which would have benefited from a Le Pen victory: Remy Cointreau, Gemalto, and LVMH (Louis Vuitton). With Le Pen’s loss, our portfolio companies leveraged to domestic growth and economic reforms will see the most benefit, such as BNP, Credit Agricole, Orange, Renault and AXA.

So, now that's Macron's in - what's next? 


Along with a strengthening economy in Europe as evidenced by stronger PMIs, European companies are seeing much higher earnings growth and, even more importantly, higher earnings than the market is currently expecting. Figure 3 shows the positive earnings surprises for EU companies for the 1st quarter of 2017. Two things really stand out for us. First, the magnitude of the positive earnings surprises is the largest we have seen since Q3 2005. Second, we have now seen five quarters of consecutive earnings growth – the longest stretch going back to Q1 2003. We believe this provides the strong fundamental backing for our European overweight strategy. With the French election behind us and another fleeting storm now weathered, we continue to stay focused on our ultimate destination: our clients’ success.

Figure 3:
Net proportion of companies reporting positive earnings surprise (%)

Source: Morgan Stanley

To view the analysis behind our position leading up to the French elections, contact us to receive a copy of our Quarterly Outlook Commentary at [email protected], or by calling (403) 234-0005.