The success earlier this year for new French president Emmanuel Macron has left France’s youngest-ever president with one of the largest parliamentary majorities in a decade. Macron and his one-year-old party have certainly done something remarkable, garnering support from both the left and right in a highly divided political system where right-wing and left-wing politicians quite literally sit on the left or the right side of the house.
Investors, who have reacted positively to Macron’s victory, have two key hopes for his presidency:
- First is Macron’s domestic reform agenda, which has both traditionally left and right-wing elements.
On the right are his promises to simplify the country’s byzantine labor laws to stimulate job growth, a vital move in an economy with an unemployment rate of just under 10%. The French labor code, running at some 3,000 pages, is famously stringent, covering issues from hiring and firing procedures to more unusual demands, including statutory bathroom breaks and specific requirements for the size of office windows.
On the other side of the political spectrum, Macron won the election on a left-leaning policy of supporting the poorest in society, promising to cut taxes for the worst off and increase in-work benefits for the lowest paid, avoiding the paradoxical situation of someone being financially better off out of work.
Achieving both will be a tough task – labor unions appear highly unlikely to roll over in negotiations, and it is still unclear to us how Macron will finance tax breaks for the poor, whether through cutting spending elsewhere or increasing taxes.
- Second is the possibility for greater eurozone cohesion and integration under Macron. The hope is that the pro-European president will reduce the likelihood of a breakup of the eurozone and encourage fiscal integration.
While we believe Macron’s victory is a good outcome for France, we think it’s important not to get carried away. We believe Macron has a tough job internally to achieve his reform agenda, and it is also key to remember he won the election on a mandate of improving the lives of the French people, rather than achieving unity within the eurozone. Interestingly, while investors overall have been positive on his victory, certain French companies which could stand to benefit from labor reforms still trade at a discount to their German peers – suggesting, we think, that the market is still skeptical.
Furthermore, the low turnout in the parliamentary elections (with the first round receiving the lowest turnout in modern French history) suggests, we believe, that France remains politically divided under a president who is not as universally loved as the media often portrays.
Even more important to us is the need to take a longer-term perspective, something we do not believe the market is doing sufficiently. In five years’ time at the next election, what will happen if the unconventional, untraditional Macron has been unable to deliver on his promises? With the rapid rise of the Front National, we would expect that voters would be unlikely to return to traditional politics, but instead that they would pin their hopes on the populist parties.
Renzi’s big Italian job
France is not the only European country on our minds. In June of this year, Italy failed to pass a bill for electoral reform which would have increased the minimum threshold required to be assigned seats in parliament from 3% to 8% (in line with the German model). It was hoped this move would reduce the overall number of parties by eliminating the smaller parties, with the aim of enabling a majority government to make decisions and get things done.
Initially, this reform had been broadly supported by the two largest parties, the ruling center-left Democratic party and the populist Five Star Movement. However, at the eleventh hour, Five Star, which had been facing a backlash from its supporters, voted to approve a last-minute amendment to the bill which ultimately led to its failure.
This reform was seen as a crucial step on the path for Italy to hold an election in the autumn, rather than in early 2018. As such, investors reacted positively to the bill’s failure, with the prospect of an election now pushed out further into the future.
However, we are not so upbeat about this result. We see the bill’s failure after a last-minute amendment, despite such broad initial support, as indicative of the problems plaguing a government with such a slight majority.
So while markets may be overheating following developments in European politics over the summer, at Newton we prefer to stand back, take the long-term perspective and keep a cool head.
This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
US - NIM
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.