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French election offers breathing room, not stability

Unlike the surprise 2016 election results in the U.S. and U.K. that sent markets reeling and investors scrambling to preserve their capital, the May 7 election of Emmanuel Macron as president of France was largely baked in to investor and market expectations.

With the French election decided, analysts expect investors' attention to shift to more economic topics, but the relative calm doesn't eliminate uncertainty — or investment challenges.

After Mr. Macron finished first in April's initial voting, markets expected he would win, and he did. Mr. Macron won the second round by almost a 2-to-1 margin over the National Front's Marine Le Pen.

UBS' Global Chief Investment Officer Mark Haefele and others last week described Mr. Macron's election outcome as providing “relief to investors.”

“We expect European markets to refocus on the eurozone's economic recovery and a gradual reduction of monetary stimulus from the European Central Bank starting early next year,” Mr. Haefele wrote.

That was a far different result from last June's U.K. vote on leaving the European Union or November's U.S. presidential election. Both of those events roiled markets immediately.

Following those events, analysts reacted “with shock to the outcome” of the U.S. election, as Pensions & Investments quoted Peter Hensman, global strategist for the real-return team at Newton Investment Management. U.K. voters' shook markets across the globe with their vote for Brexit.

But this month's election, while offering a break from unexpected, market-shaking results, does not eliminate political uncertainty as a force moving markets.

Mohamed El-Erian, chief economic adviser, Allianz, pointed out in a column published May 8 on LinkedIn that uncertainty is likely to surround “how relative newcomer Emmanuel Macron will manage to govern in a country accustomed to mainstream politics.”

That means French bond yields should get closer to those from Germany, and stock markets aren't expected to have any sudden shudders.

UBS' Mr. Haefele wrote that Mr. Macron's “victory should ... prove supportive for risk assets in the near term.”

And Mr. El-Erian noted the relief that followed Ms. Le Pen's defeat is likely to be short-lived.

“Now that Macron has been elected, markets will be gradually shifting their focus to his ability to overcome gridlock both at home and in Europe,” he wrote.

But the certainty that businesses and markets need to grow and create value for investors is still elusive, and that is a longer-term problem, especially for long-term investors. Pension funds, endowments, foundations and sovereign wealth funds are trying to meet the returns required by the retirees and institutions that rely on them.

Vanguard Group founder John Bogle, speaking last month at a conference at Princeton University, said his “reasonable expectation” for a typical 60/40 portfolio return over the next decade is 3.6%, before fees and other costs. He projected a 4% return from equities and 3% from a portfolio of government and high-grade corporate bonds.

That is well below recent levels, and in most cases not enough to meet the return levels most institutional investors have long expected.

So while some of the most immediate political obstacles have shrunk to manageable levels, market challenges, geopolitical tensions and the remainder of the year's elections still offer potential disruptions.

French and British parliamentary elections are scheduled for June, and German elections are coming in September. The U.S. midterm elections of 2018 already are looming over Washington.

If electoral politics are not a headwind for the short term, they are not yet providing the stability or, better yet, the boost necessary to overcome the slow growth that is otherwise projected.

This article originally appeared in the May 15, 2017 print issue as, "Breathing room, not stability".