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Commentary

Vive la re-election

April 7, 2022

On April 10, people in France will go to the polling booths for the first round of national voting. Assuming there is no majority, the two candidates with the most votes will proceed to a run-off two weeks later with the winner being declared President.

According to opinion polls, incumbent President Emmanuel Macron favored to win the upcoming election and be re-elected. Macron’s had a bit of a rollercoaster over this term, pushing through some reforms, such as facilitating the process for companies to fire workers, cutting corporate taxes and introducing new security laws to tackle terrorism. On the other hand, a proposed fuel tax in 2018 was abandoned after protests by the “gilets jaunes”, and the Covid-19 pandemic hampered a pledge to reduce the unemployment rate to 7% by 2022. Russia’s invasion of Ukraine has increased Macron’s popularity, placing him in a prominent role as a liaison to Vladimir Putin and boosting his image as a statesman who represents France well internationally – one of his key strengths compared to his rivals. 

Marine Le Pen, who was runner-up in the last election, has once again emerged as the closest rival in the first round. While the family name is associated with the far-right in France, Le Pen is no longer considered the extreme right vote with the emergence of Eric Zemmour. This will dilute her votes somewhat. Le Pen continues to campaign on a consistent anti-immigration message, proposing a referendum on restricting immigration. Once an admirer of Russia’s Putin, Le Pen has condemned the invasion of Ukraine. 

Of the other prominent candidates, the far left is represented by Jean-Luc Mélenchon. He is a staunch critic of Macron and has some opposing views, such as lowering the retirement age by two years to 60 and promising a big rise in the minimum wage. His support has declined over the past month due to a more lenient stance on President Putin and a desire to leave NATO. Valérie Pécresse, a centre-right candidate, was once seen as the strongest opposition to Macron but has fallen away as the campaign advanced. On the far-right, and eating into Le Pen’s votes, is Éric Zemmour. His campaign is built on a more hard-line nationalism than Le Pen, having previously blamed his perceived decline of France on immigration and Islam. His popularity has declined as he unveiled some severe proposals, such as deporting 100,000 immigrants each year, particularly those from North Africa.

If we look at Macron and Le Pen as the two most likely to advance to the second round, the largest differences are in immigration rather than economic policy. However, pension reform is one area where they disagree. Macron wants to increase the retirement age, while Le Pen opposes. Macron may get the benefit of the doubt here as some of his reforms are starting to bear fruit, and the potential growth of France is now above Germany’s.

France has also fared relatively well during Covid and the recovery, with the country’s real GDP above that of the larger Eurozone. One of the reasons for the outperformance, especially against Germany, is the lower exposure to manufacturing and the impact of a challenging supply chain dampening German growth. The French economy should also be less impacted by the Russia/Ukraine war as it relies more on nuclear power compared to Germany’s dependence on gas and, in particular, Russian imports.

One area where Macron and Le Pen (and most of the leading candidates) are in agreement is the expansion of nuclear power. The percentage of energy derived from nuclear is already significantly higher in France than elsewhere in Europe, and the direction being taken until recent events was to reduce this. However, Macron is considering building eight more nuclear reactors in addition to the six announced recently. Another point in common is an increase in military spending. Public spending will come under some scrutiny, as French public debt has risen well above 100% of the GDP. There are potential savings from further reductions in public employment and raising the retirement age, both of which Le Pen opposes.

Macron has implemented some measures to mitigate surging energy prices, but increasing purchasing power for households will be a hot topic. Macron wants to raise the threshold for bonuses paid to low-paid workers to be tax-free, while Le Pen prefers to slash social security contributions and increase financial aid for families.

In June, once the presidential situation is resolved, French voters return to the polls to elect a new parliament, which means a new prime minister. The prime minister is appointed by the president but has to reflect the majority in parliament, so the key question is: will the president and the majority of members in parliament come from the same party? If so, it is easier for the president to execute their policy agenda more easily. If not, a situation called cohabitation comes into effect, limiting the ability of the president to implement their agenda. Cohabitation has happened three times.

While there has been no consistent market reaction over recent election outcomes, one would think that given the recent relative outperformance of the French economy, some stability would be welcome from investors. Global Alpha currently has three French holdings in our International and Global strategies. 

Rothschild (ROTH.FP)

Rothschild is one of the world’s largest independent financial advisory groups. The company is a global leader in M&A advisory, especially in Europe, but is strategically diversifying by building wealth management and merchant banking franchises to give more recurring earnings. Some companies don’t have the internal expertise when considering M&A strategy or some form of restructuring so they reach out to Rothschild, who give an independent opinion, which is an important differentiating factor. Rothschild helps clients choose how best to approach a potential sale/ issuance/ restructuring, and may help them to select other banks (that have more developed equity and debt capital markets capabilities) to handle the transaction mechanics. The wealth and asset management franchise is mostly a European business, focusing on high net worth individuals (>€1 million in France and >€5 million elsewhere). The merchant banking franchise is present in both; Europe and the United States (U.S.), focusing on private equity and private debt with a specialization in health care and technology.

Sopra Steria (SOP.FP)

Sopra Steria is a leading European IT services company offering consulting, digital services and software development. The company aims to help its clients in their digital transformation journey by speeding up changes in client business models, internal processes and information systems. In 2021, spending on digital services reached $318 billion, with the market expected to grow over 5% through 2025. Most of Sopra’s revenues come from consulting and systems integration. The government and public sector account for the largest share of revenues at 26%.

Lisi (FII.FP)

Lisi is an industrial company specializing in the manufacture of components for the aerospace, automotive and medical sectors. For aerospace, which accounts for 48% of group revenues, Lisi manufactures fasteners, assembly and structural components for the largest players in the sector. The division has been deeply affected by the pandemic but appears to be entering a new growth cycle as the production of single aircraft, in particular, seems to be ramping up. For automotive, Lisi provides metallic and plastic assembly solutions and safety-mechanical components for global OEMs and Tier 1 suppliers. The division has recovered well from the 2020 lows but continues to be challenged by supply chain constraints. For medical, Lisi manufactures implants and other instruments. Minimally invasive surgery that was delayed during the pandemic is resuming in hospitals.

At the time of writing, the most recent opinion polls have seen the gap between Macron and Le Pen narrow. Some of them even to within the margin of error. This has seen French equities underperform as the risk of a Le Pen victory increases. So if Macron does succeed in being re-elected, as the polls still suggest he would win in a second round against Le Pen, we could see a small catch-up rally in French equities.