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Should investors be worried about the French election?
6/20/2018 7:07:26 AM
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Investment management insights from a leading Canadian expert.

By Tyler Mordy  | Friday, May 05, 2017


Emmanuel Macron (a Europhile) and Marine Le Pen (a Euroskeptic) have advanced to the second round of the French Presidential elections, to be held on Sunday, May 7. Macron currently leads in popular opinion polls. Even though most traditional opinion polls have lost credibility, political risks are clearly elevated in the eurozone. Should investors worry about the outcome?

Beyond investors’ immediate political concerns (which have dominated the investment landscape over the last year), the regions’ cyclical upturn is gathering strength based on a confluence of positive factors: rising confidence, increasing profit margins and highly accommodative financing conditions. In an unloved region of the world, this is an interesting investment setup.

Consider France itself. Can pessimism toward the country get any worse? Bank of America Merrill Lynch’s latest survey of money managers recently revealed that the country’s equities are the least loved major equity class in Europe.

This may be a contrarian’s dream. At times like this, it pays to look for sentiment shifts at the margin. Any sign of a brighter outlook can have a large impact on expectations. With significant space for investors to downgrade their optimism towards the US, the opposite is true in France – beyond the election risk, plenty of room for positive surprises exists.

Below, we lighten the gloomy mood toward French stocks with our own joie de vivre: It is time to buy. Consider the following:

1. Growth. French PMIs are pointing to solid growth, with the country’s composite climbing to an 18-month high.
2. Inflation. With unemployment falling, and wages beginning to pick-up, inflation expectations are finally starting to rise.
3. Interest rates. A steepening yield curve has lifted bank stocks, which tend to lead to increased credit creation.
4. The euro. With the euro nearing parity to the U.S. dollar, the country’s competitiveness has dramatically increased over the last few years, further priming it for a profit up-tick (and prompting a recent rash of positive earnings revisions)
5. Equity valuation. French stocks are cheap, trading at 1.59 times their book value, compared to the U.S. at 3.09 times (MSCI figures).

Investment implications

Much like the conditions in 2016 with Brexit or U.S. elections, the course of the French election will dictate near-term movements in eurozone, and perhaps even global equities. However, investors should look beyond the political risk of France’s presidential election in April and May and tactically buy French equities based on solid macroeconomic and valuation support.

Finally, for fellow wine enthusiasts looking for value, we recommend the 2010 Château Jean De Trimoulet, an elegant (yet very attractively priced) Bordeaux with lots of ripe black plum, coffee and just a hint of nut.

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Gobal Thinking feature. used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at . Follow on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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