Macron rally not over yet

Emmanuel Macron’s emphatic victory in the first round of the French election has given markets a big shot in the arm. The euro has surged to $1.09, its highest level against the dollar since November, and has also done well against sterling. Macron has also lit a fire under French stocks. The CAC-40 has risen to 5,288 – more than 3% higher than the level at which we suggested you should buy into it. Indeed, if you had taken this page’s advice to buy at £3 per point you would be £567 in profit.

This raises the question of whether you should take your profits, or stick around for another fortnight in the hope of making even more money. In theory Marine Le Pen could still win the French presidency since the two candidates will be facing each other in a run-off on 7 May. Indeed, given that Macron and Le Pen only received 24% and 22% respectively, over half the potential electorate are up for grabs, at least on paper. There’s also the possibility that Macron’s voters could not bother to turn out.

Yet it’s almost impossible to see Le Pen winning. She trails Macron by more than 20 points in the opinion polls, a gap that has actually widened in recent surveys. While there is the possibility that complacency could depress voter turnout, or she could do exceptionally well in the head-to-head debates, such a turnaround would be unprecedented in political history. Indeed, her decision to resign as the head of the National Front smacks of desperation. It’s also important to note that Le Pen also slightly underperformed the final first-round polls, throwing cold water on the idea that there are many shy Le Pen voters.

A more convincing argument for taking money off the table is that, since Macron is now the firm favourite, all the good news for the markets is priced in. This means that even if he wins, the upside is limited, especially if the result is closer than expected. Indeed, this could end up being a case of “buy the rumour, sell the news”. Still, if you look at the bookmakers, you can see that there are still a substantial number of people who think that Le Pen is in with a small but significant chance of winning, so there is still money to be made.

As a result, I’m going to be recommending that you stick with the trading idea that I outlined in the column a fortnight ago: buy the CAC-40 (or the France 40 as IG Index calls it) at £3 per point. However, whatever happens I suggest that you close your position out in a fortnight’s time. The French market is expensive on measures such as the cyclically adjusted price/earnings (Cape) ratio and price-to-book-value ratio, and there are better long-term bets available.