INTRO

Sunday 23rd April will see voters head to the polls for the first round of voting in the French Presidential election. The first round of voting will see 11 candidates looking to secure the minimum 50% of the total vote to secure the French Presidency. Should no individual candidate secure this then the race will go to a second round on Sunday May 7th which will see the two best performing candidates of the first round go head-to-head in a winner takes all vote.

NB. the exit poll for the first round is set to be released at 1900BST on Sunday 23rd April. Note, that polling stations are closing an hour later than previous elections and as such, the projected result at 1900GMT will be based on a partial vote count and not a full vote count like in previous years. As such, this could lead to some delay for the result but the final result is expected between 2100-2300BST.

CANDIDATES

There are 11 candidates for the first round. However, for the purpose of this piece (and given recent polling data), we will look at the four main candidates as briefly detailed below.

Marine le Pen – Leader of the far-right Front National whose main policy aims are to remove France from the EU via referendum, expel illegal immigrants, fix the retirement age at 60 and working week at 35 hours.

Emmanuel Macron – Leader of the recently formed ‘En Marche’ (On The Move) party, not an MP and is seen as the centrist option in the race. Main policies include reductions in corporation tax, reduced unemployment and a EUR 50bln public investment plan.

Francois Fillon – Nominee for the centre-right ‘The Republicans’ party and former PM (2007-2012). His campaign has been severely dented by various allegations of corruption but nonetheless remains in the race. Main policies include to reduce 500,000 public sector jobs, remove the 35-hour work week, scrap the wealth tax and lift EU sanctions on Russia.

Jean-Luc Melenchon – Founder of the left-wing ‘Parti de Gauche’ (Left Party) who previously came 4th in 2012 Presidential race with 11% of the vote. Main policies include the remove of France from European treaties, 100% income tax on all French nationals earning in excess of EUR 360,000 and the establishment of a constituent assembly to adopt greater powers.

POLLING

Background: Up until the past few weeks, the French Presidential election was very much seen as a tspanee-horse race between Le Pen, Macron and Fillon with Fillon tspanowing away his lead that was seen at the start of the year and slipping into third place due to various corruption allegations. Given the allegations surrounding Fillon and the subsequent impact on his campaign, this then led many commentators to focus on a Le Pen vs. Macron run off in the second round. However, since the recent television debates and media coverage, the polls have narrowed and left-wing candidate Melenchon has entered into the race and seen his numbers increase from around 11% in mid-March to around 19% currently. The emergence of Melenchon has actually come to the aid of Fillon with the fears surrounding the left-wing candidate mobilising support on the right who see Le Pen as too extreme a candidate. Therefore, given the emergence of Melenchon, modest recovery of Fillon and decline in numbers for Le Pen and Macron, the first round is now very much seen as a four-way race between the above and much closer than many had anticipated. Please see the below chart (via the FT) for a depiction of the above.

Second Round: As discussed, the race is very much likely to lead to a second round face-off between two of the above candidates.

Primarily, polling for the second round has centred around Le Pen vs. Macron or Le Pen vs. Fillon with polls conclusively suggesting that Le Pen (the most likely victor in the first round), would not have enough support in the second round to defeat

Macron or Fillon as shown below.

That said, Rabobank have considered the six different combinations of candidates in a second round vote and their various chances of winning.

Macron vs. Le Pen – Macron lead by 22%. Macron vs. Fillon – Macron lead by 32%. Macron vs. Melenchon – Macron lead by 6%. Le Pen vs. Fillon – Fillon lead by 10%.

Le Pen vs. Melenchon – Melenchon lead by 14%. Fillon vs. Melenchon – Melenchon lead by 26%.

MARKET REACTION FOR DIFFERENT OUTCOMES

In terms of a potential market reaction, below details the likely market reaction to first round performance of a candidate that would be indicative of success in the second round e.g. If Macron was to face Le Pen in the second round he would be deemed to beat her (based on the above numbers) despite possibly obtaining a smaller percentage of the vote in the first round etc. Note, that another factor for consideration would be strength of performance in the first round which could reduce the validity of the above numbers e.g. if Le Pen won 45% of the vote compared to 25% for Macron then the above probabilities may not hold (particularly given concerns over the propensity for Macron voters to head to the polls vs. those of Le Pen).

Le Pen – Citi expect a sharp fall in EUR (due to wish to remove France from the Euro), a sharp sell-off in the 10yr OAT with the FR-GE spread to possibly widen by 200 basis points and a 5-10% decline in French equities by the end of June 2017. Deutsche Bank are slightly more bearish and would look for a 15% decline in equities. Elsewhere, JP Morgan would expect EUR/USD to slip to 0.9800.

Macron – Deutsche Bank suggest that there is limited scope for a relief rally in French equities given current valuations. However, JP Morgan suggest that a return of global investor flows could lift equities by around 10% with Morgan Stanley suggesting that banking names such as BNP Paribas and SocGen could rise by around 15-20%. Nomura suggest that EUR/USD could rise 1%, whereas UBS would look for a 2% increase.

Fillon – Citi expect a reduction in the FR-GE spread to 35-40 basis points and support for EUR. Elsewhere, Natixis believe that the FR-GE spread could narrow to around 30bps.

Melenchon – Goldman Sachs say that they would expect markets to go in to a frenzy in a similar vein to a Le Pen victory given the support for anti-establishment sentiment. In stock specifics, Melenchon would be seen as a negative for equities due to his promotion of workers rights and denouncement of executive rights while also seeking to re-nationalise EDF and Engie.

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