The week focuses on the French elections that start on 23 April and the risks they pose for European equities in particular vis à vis our portfolios. Also covered is some of the latest UK, European and US economic data.
FRENCH ELECTIONS LOOM LARGE
Polls continue to put Marine Le Pen and Emmanuel Macron through to the second round of the French presidential election. But while the relevant polls only have Le Pen winning 40% of the 7 May vote, the same polls suggest that 37% of the electorate may stay at home. In previous elections, this number was around 20% which makes predicting the result much more difficult not least as Le Pen followers are far more likely to vote (85%) versus Macron’s supporters (65%). This is different to the last Le Pen second round vote when Jean-Marie was defeated in 2002 by a right-left unity driving turnout to 80% and coalescing against him, but only time will tell for the 2017 result.
INCREASE IN UK EXPORTS NARROWS THE TRADE GAP
The UK’s current account deficit came in at £12.1bn in Q4 2016, a fall of £13.6bn from a revised Q3 deficit of £25.7bn, primarily due an increase in the value of goods being exported of £7.6bn. Our trade in services surplus also widened by £2.4bn to £26.8bn in Q4. Drilling down, the current account deficit with the EU stands at £19.5bn while we enjoy a surplus of £7.4bn with non-EU countries. The Q4 deficit equated to 2.4% of GDP at current market prices, down from the 5.3% from the previous quarter.
MIXED EUROZONE DATA
The Eurozone’s unemployment level fell 0.1% month-on-month to 9.5% in February. In February 2016, it stood at 10.3%. This was in line with consensus forecasts and the lowest rate since May 2009. Youth unemployment meanwhile declined to 19.4% from 19.8% month-on-month and from 21.6% year-on-year. However rates across the region vary with Germany standing at just 3.9% versus Greece’s 23.1%. Mixed news also came through the Business Climate Indicator for the Euro area which stood at 0.82 in March 2017. This was the same as in February 2016, but below the market expectations of 0.9. Also published was the Economic Sentiment Indicator, which was also broadly unchanged at 107.9, but showed the variation in Eurozone economies given it only rose in Germany (+0.9), stayed broadly inert in Italy (-0.1) and among the Dutch (-0.3), while it weakened in France (-1.0) and Spain (-1.8).
US Q4 2016 GDP DATA FINALISED
According to the US Commerce Department, the US economy grew faster than had been initially estimated in Q4 2016, expanding at an annualised pace of 2.1% and up from the earlier estimate of 1.9%. However, the revision did not change the GDP growth rate for the whole of 2016, which remained at 1.6% – the slowest growth rate since 2011.
A Marine Le Pen victory could have a destabilising effect on European risk assets, particularly if she gets any support in parliament to attempt to take France out of the Euro following the June legislative elections. However, clearing the French election hurdles might give equities a boost. European companies are having one of their best periods for earnings since the financial crisis, growing revenues rather than cutting costs and still offer good value. Therefore, we have taken different positions on Europe, depending on the risk profile. For the more cautious clients, we have trimmed back last quarter’s overweight to an underweight. While for the more adventurous clients, we are prepared to maintain our overweight, stomaching any short-term market movements in the interest of capturing potentially large gains post France’s elections.
THREE ANNOUNCEMENTS DUE THIS WEEK
05 April – UK Purchasing Managers’ Index // 05 April – US Federal Reserve Minutes // 07 April – Eurozone Inflation Rate
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SOURCES: OPINIONWAY, EUROPEAN COMMISSION, BLOOMBERG, 7IM