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French government bonds have been taking a different direction to their German counterparts. Political risks have mainly been the main contributing factor as presidential elections are due between the end of April and beginning of May.
Historically, since 1974, the French elections were always a two way race between the Socialist Party (PS) and the recent Republicans, previously the Union for a Popular Movement (UMP), except once in 2002, whereby Jacques Chirac (UMP) faced off Jean-Marie Le Pen of the National Front party (FN)
In 2002, the PS and UMP united to strongly oppose the threat of the unpopular Eurosceptic, anti-establishment FN in the second round of elections, whereby, then President Jacques Chirac won re-election with a strong 82.2% of votes.
Today, events may very well take on a different outcome. Over the past couple of years, the FN party with a strong anti-immigration agenda has gained popularity with the ever increasing number of terrorist attacks that took place in France.
The insecurity of voters besides the disappointing tenure of Francois Hollande as President (representing the PS) has given Marine Le Pen the upper hand for the upcoming 1st round of the presidential elections.
Election polls currently show the FN candidate winning the 1st round of elections to then be defeated by Fillon in the 2nd round, on expectations the PS and other defeated parties unite against the FN.
Though, the division of endorsements within the Socialist party and the recent payment legitimacy scandal affecting The Republicans current candidate Francois Fillon, risks jeopardising Fillon’s party status of favourites to the benefit of Marine Le Pen, who stands a bigger chance of winning the presidential election from the lack of unity within the two leading French political parties.
A Le Pen win, although unlikely, based on the 2002 landslide 2nd round vote, should not come as a major surprise. After all, Brexit, Donald Trump’s election and the renewed popularity of protectionism worldwide and Euroscepticism across the Eurozone, have given investors the initial blows to weather some more.
Either way political tides are turning, and the return of protectionism seems to be shaping the future of global economies.
Implications?
Well, Inflation for one as a result of higher border taxes could pose significant problems and cause different means of policy measures to governments aiming to boost GDP growth whilst containing inflation.
Other implications fall around global tensions. Scaling back from Globalisation will not only have a potential negative impact on growth for many global corporations established across borders, but rising anti-immigration stances risk sparking conflicts between nations at the forefront of such protectionist measures.
Investment opportunities will present themselves, as they always do, though solid fundamentals should support the changes markets will experience through technical movements as a result of volatility, investor concerns and changing investor preferences.
Until then, if investing in the Fixed Income space, holding low duration and solid corporate names in your portfolio may weather you from the hawkish policy measures of the US Federal Reserve (Fed) and tapering hints of the European Central Bank.
However, given Trump’s proposed fiscal policy measures, the three initial rate hikes planned for the current year by the Fed may potentially be reviewed, and a more dovish tone undertaken to protect against the threat of an ever strengthening dollar. Only time will tell.
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