A win for Marine Le Pen in the French presidential election could be the biggest geopolitical risk to face the Eurozone this year, having a negative effect on both the euro currency and the bond market.
Despite recent improvements in the euro-area economy, a win for controversial right-wing candidate Marine Le Pen may stall economic progress, according to the latest report from Pioneer Investments.
Disaggregation risk for the Eurozone and debt redenomination risk will be the major concern for investors going into the spring, with the polls showing that a Le Pen victory could be on the cards. Currently opinion polls have Le Pen in the lead with 25.5 percent of the vote, with Emanuel Macron close behind with 24.5 percent.
The asset management firm attribute a low risk of a Le Pen Win, but acknowledge that support for populism is on the rise; if she attained the presidential office, Head of Global Assets Monica Defend believes the French institutional set up “should be robust enough to limit her ability to call for a referendum on the Euro exit.”
“If the perception of a euro break up increases, we would expect weakening of the euro currency and strong volatility in the bond market,” the report continues.
“In this case, we would likely see a further widening of spreads, including peripheral spreads (particularly Italian), as well as a flight to quality versus German Bund, Swiss Franc and Gold.”
Diego Franzin, the asset management firm’s Head of European Equities, also warns of the risk of market complacency.
“We are aware that there are signs of market complacency, especially considering the political challenges which not only face France but also Italy, the UK and Europe as a whole.
“Even if the results of the Dutch elections have reduced the possibility of a European crisis, these risks cannot be dismissed. The immediate reaction to a Le Pen victory could be quite dramatic. Even if the scope for implementing her policies is quite limited, her victory would be a shock for the Eurozone as a whole and would likely trigger a deposit flight from France, ECB intervention and sharp volatility in bond and equity markets.”
Overall, however, Pioneer Investments retains an optimistic outlook on the European economy going forward. France’s economy is highly exposed to the euro-area domestic demand and should benefit from the strong euro-area growth numbers, and the French stock index has largely global reach, limiting the damage from domestic issues.
“For these reasons we maintain a constructive outlook for European Equities and we rate the probability of a new Euro crisis as very low”, the report concluded.