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Will Marine Le Pen become the next French president, threatening to lead France out of the euro area?
The first round of the French presidential election is scheduled to take place on 23 April. The front-runners who look likely to make it to the second round on 7 May are centrist Emmanuel Macron and populist Marine Le Pen. Nevertheless, as the first round is approaching, both of these candidates have lost momentum. Moreover, hard-left candidate Jean-Luc Mélenchon is surging in the polls and is almost neck-and-neck with once-frontrunner François Fillon. In other words, what once looked like a simple two-way choice is becoming increasingly complicated.
Base case: Victory by Macron or Fillon
Our base case, in line with opinion polls, is a victory by a moderate candidate, most likely Emmanuel Macron (but possibly François Fillon).
This outcome would eliminate the risk of a potential French referendum on euro area membership in the immediate future. Falling risk premia in this scenario would support risky markets and CIO's current moderate risk-on investment stance.
Risk case: Victory by Le Pen
Opinion polls, and it seems most commentators, have come to the conclusion that success for Macron is all but assured. However, we would caution against complacency. We presently consider the risk of a Le Pen victory as medium to high and subjectively assign to it a 40% chance. Granted, factoring in a usual (or even an unusual) degree of error in the polls still would not suggest a Le Pen victory; however, the troubling aspect is that the share of Macron's supporters who say they are open to changing their minds is meaningfully higher than for either Fillon or Le Pen. If Macron does not make it to the second round and Le Pen is facing a less centrist candidate, this could boost her chances of winning and likely raise concerns about the political future of Europe.
What is the global risk radar
CIO risk scenarios are defined and developed by the CIO Cross-Regional Investment Office in collaboration with CIO economists and asset class experts. Scenarios are chosen for coverage based on estimated probability of occurrence and expected global market impact over the tactical investment horizon of six to 12 months.
What it means for investors
CIO sees a Le Pen victory as a plausible risk scenario and an outcome that seems to be underpriced by the market. We believe investors should consider hedging against this risk.
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