This year’s French election turmoil could be a cracking buying opportunity

People are waking up to the idea that Marine Le Pen could win the French election. If she does, it would create a great buying opportunity for investors.


Marine Le Pen: will "populism" win the day again?
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If you were a populist politician with absolutely "no chance" of winning an upcoming election, who would your ideal opponentbe?

I don't know about you, but I'd opt for someone who had maybe been tainted by some sort of corruption scandal. Maybe someone who looked as though they might have been feathering their own nest, or taking advantage of the voters. You know, someone with a whiff of the elites about them.

Better yet, if it was someone who had previously been seen as "clean", and a pretty straight kind of guy. Someone you could accuse of hypocrisy. Someone who'd been handing out cushy jobs to their own families while ordinary voters were struggling to get a foot on the employment ladder.

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So Marine le Pen must be thanking her lucky stars this morning...

The French election no sure thing

Franois Fillon was the great hope of this year's French presidential election race. Fillon is the man who would be "France's Margaret Thatcher" (stop sniggering at the back there).

Towards the end of last year, markets started to relax as it seemed he would also be the man to beat the National Front's Marine Le Pen. Not only that, but Fillon is genuinely conservative.

And yes, I know that the idea of France electing a Thatcher figure does seem hard to believe, but stranger things have happened. Faced with a stagnant economy and an extremely uninspiring socialist president, voters might well have opted for Fillon to shake things up.

So for a moment, it looked like the big electoral surprise this year might actually be some proper reforms and who knows? a French revival. Perhaps given the right sort of government Paris really would become a genuine rival to London as a financial centre. Perhaps it was time to look at buying up property in whatever the French equivalent of Shoreditch is.

And until a couple of weeks ago, it looked like he would definitely win the election. (There are two parts to the election a first round on 23 April and a second on 7 May).

And then almost inevitably the dirt came out.

Fillon has had his family on the payroll. Big deal, you might think. Loads of politicians in this country have their spouses as assistants on their expenses claims. And it's fine in France too (or at least it was).

The big question is whether his wife, son or daughter actually did the jobs they were paid to do, which is what the Paris prosecutor's office is looking into. He says that they were, and that he's done nothing wrong.

However, the damage has been done. He's no longer favourite to beat le Pen. In fact, it looks like he'll get kicked out at the first round, leaving former investment banker and centrist candidate Emmanuel Macron to go up against her.

So yesterday, he gave a big speech to set out what he plans to do next. Some people in his party had argued that he should step down. But that's not what tends to happen in these situations.

Instead, Fillon apologised and now plans to publish a list of his assets. But he also plans to stick with the task. "There is no Plan B. I am the only candidate who can bring about a national recovery."

According to Reuters, one of his colleagues responded: "I sincerely hope we don't wake up with a hangover on 23 April."

A resounding vote of confidence, then.

Le Pen could create a cracking buying opportunity for Europe

Right. So Le Pen who is the "Brexit/Trump" candidate will be going up against either a free marketeer who is now tainted (regardless of the truths of the case); or a "new Labour"-style ex-investment banker.

She's got no chance, we're assured. And maybe that's true. Maybe the French electoral system is set up in such a way as to make it uniquely impossible for this specific person to become president. I don't know enough about the ins and outs of the French system to tell you one way or the other.

But what I do know is that people who understood the US electoral system far, far better than I did all said that Trump could never win.

He won. So forgive me if I don't take the experts' word on this occasion.

And the market seems to be waking up to that too. The euro has slid hard this morning, and there are signs of stress in the bond market again. That's partly because Greece is showing signs of kicking off (I'll look at that later this week, when I can bear to trawl the whole Greek saga again).

But it's also very clearly because people are starting to consider the potential for a Le Pen victory.

A quick explainer: the best way to work out where the political risk is rising in the eurozone is to compare bond yields between countries.

The absolute level of yields matters, of course. But what's more informative is the "spread" between different countries' bonds. The spread is just the difference between the yield on one bond and the yield on another.

By looking at the spread, you can get an idea of how much riskier the market thinks one set of bonds is than another set.

In the eurozone, Germany is effectively the risk-free' rate. Germany will pay you back. And if Germany leaves the euro, its bonds will become more valuable, not less, because they will redenominate into deutschemarks. (Or at least, that's the current theory all of these things are subject to change dependent on circumstances.)

So if you want to work out how nervy investors are about a specific eurozone country, you compare its bond yields to those of Germany. And right now, the spread between the yield on French ten-year sovereign bonds and the yield on German ten-year bonds is at its highest level in four years.

What does that mean in practice? It means that political risk is starting to be properly priced in to the European markets. That in turn suggests that between now and the French election, it's going to be hard for the euro to get much strength behind it.

However, that's not bad news for the eurozone as a whole after all, a weak euro is European Central Bank boss Mario Draghi's goal. And this is all coming at a time when the economic data in the eurozone is picking up (from the usual low base, of course).

This in turn means that stockmarkets in the region will be playing tug of war, between struggling with jittery investors and, most probably, seeing improving results.

Does that mean you should buy more Europe just now?

Well, make no bones about it if Le Pen wins, investors will sell first and ask questions later. The euro will tank, and I suspect eurozone stocks would in the first instance tank too.

But if that does happen, I have to admit that I'd view it as a cracking buying opportunity.

The one thing to remember about all of these things is that, even if le Pen wins, France won't leave the eurozone that day. It may not leave at all. So I'd be using the next few months to either prepare a shortlist or simply start drip feeding into a decent European investment trust (if you're not already).

Even if "Frexit" arrives, it could be as much of a damp squib (in terms of crashing the market) as "Brexit" was. And you want to be prepared to take advantage of that.

For some ideas on investment trusts to buy, you should take a look at MoneyWeek's investment trusts special, out now. If you're not already a subscriber, sign up here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.