An Important Election in France

On April 23, French citizens voted in the first round of their highly anticipated presidential election. The top two finishers, pro-European Union (“EU”) centrist Emmanuel Macron and anti-EU, far-right Marine Le Pen, will face off in a May 7 runoff to determine the ultimate winner. In the immediate aftermath of the first round of voting, markets rallied based on the above-expectations performance of Macron, who is generally trusted among business leaders and is strongly in favor of France remaining in the EU. Le Pen, riding the coattails of the rise in populism and Brexit, made France’s potential departure from the EU a pillar of her campaign.

A Macron win on May 7, largely priced into markets, would alleviate pressure on the stability of the EU in the short term. A win by Le Pen, however, would likely cause substantial volatility and a potentially large drop in the value of European equities due to fears that France would leave the EU and Eurozone, hastening its ultimate collapse. Pending the outcome of the election, we reiterate our neutral-to-underweight posture on EAFE equities. A Macron win combined with increased economic growth (which remains very low) would likely cause us to recommend a more neutral posture later in 2017.

The Drums of War

For the past 72 years, the world has thankfully turned without a major global war. Over the past year, however, the risk of such an event appears to be rising. Events in Syria and unsettling actions by North Korea have caused increased tension among the U.S., China, and Russia. Should this tension break into an armed conflict, the impact on markets could be severely negative. A tail risk like war always exists and generally remains a tail risk; currently this risk appears to be increasing. We do not recommend any actions in response to this increased tail risk now; nevertheless, it as a key risk for the coming year.