Quick view: European elections and French politics
French President Macron has gambled on a snap election as the EU election results fuel turmoil, but what does this mean for European equities? Richard Brown, Client Portfolio Manager, gives a quick insight into some of the views on at Janus Henderson’s European Equities team.
3 minute read
Key takeaways:
- The EU election result represents a potentially significant moment for the political status quo in France, representing a setback for Macron’s pro-EU cross-border integration plans.
- At the time of writing European markets have sold off but not excessively and the euro has softened. But what does this mean?
- In terms of European equities, this result has taken the gloss off a positive trend thus far in 2024, but we see it as a setback for sentiment, rather than a more fundamental shift in narrative.
The results of the European elections this weekend have created drama in the political landscape in Europe as far-right parties made progress across the continent. Probably the biggest news was the result in France, where President Emmanuel Macron called a snap election after National Rally, headed by Marine Le Pen and Jordan Bardella, won more than twice the votes of Macron’s centrist coalition. The developments in France support the argument for investors needing to navigate political developments carefully in 2024 and why ‘political realignment’ is one of Janus Henderson’s Three drivers for long term investment positioning.
For France, this was a significant moment. Macron’s popularity has been waning for a while, but the scale of the loss prompted his decision, paving the way for early elections. The initial shock will no doubt hang over French risk assets, and particularly domestically oriented stocks, for the next few weeks, if not longer, depending on the election outcome. While France saw the most dramatic shift, it reflected a rise in support for nationalist/protectionist parties across Europe.
Cross-border integration set-back
We see certain consequences to that. The result in France is a setback for the European Union (EU) cross-border integration theme that Macron has championed. This is likely negative for banks, given that expectations for pan-European M&A activity in the industry leading to a more consolidated market will now be tempered. It also represents a setback for Europe’s ability to conceive a continent-wide industrial policy to compete with the billion-dollar reshoring/repatriation ‘self-sufficiency’ strategies from the US and China.
Monetary policy implications
At the time of writing European markets have sold off but not excessively and the euro has softened. While a weaker euro makes it harder for the European Central Bank to cut rates, it will be interesting to see how rate expectations change. In our view, there is still a reasonable likelihood that more monetary policy movement will be on its way following last week’s cut. A weaker currency also might be mildly helpful for European exporters and small-caps. The tidal nature of European politics is also a known factor. The right has won elections before in Europe; yet it has rarely led to a dramatic shift in policy.
For Europe as a whole, we would argue that this probably represents a small de-rating event, taking the gloss off what has been quite a strong narrative thus far for European equities in 2024. The results of the EU parliamentary elections were reasonably in line with polling data leading up to the votes, suggesting that risks were already priced in, to an extent. However, these results could represent a bit of a sentiment hit to the region, with marginal investors reminded of the political risks that had been pushed to the background over the past year.
Narrative remains intact
Europe is also not just a domestic story. The continent is home to a range of global champions that happen to be listed with a European postal address, for which the backdrop looks to be one of recovery alongside the global economy. In summary, we see this as a mild setback for the region but, with the strong valuation argument versus the US remaining, and the global nature of European domiciled businesses, not a major shift in the narrative.
De-rating: The downward adjustment of a company’s financial ratios, such as the price-to-earnings (P/E) ratio, in response to business or market uncertainty. Or, in the case of a bond, lowering the credit rating.
Equity: A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Reshoring: Transferring business operations that were moved overseas back to the home country.
Small caps: Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In respect of the equities portfolio within the Fund, this follows a value investment style that creates a bias towards certain types of companies. This may result in the Fund significantly underperforming or outperforming the wider market.
Specific risks
3 minute read
Key takeaways:
- The EU election result represents a potentially significant moment for the political status quo in France, representing a setback for Macron’s pro-EU cross-border integration plans.
- At the time of writing European markets have sold off but not excessively and the euro has softened. But what does this mean?
- In terms of European equities, this result has taken the gloss off a positive trend thus far in 2024, but we see it as a setback for sentiment, rather than a more fundamental shift in narrative.