France. Political update

Transcription

1 France Political update November

2 Our initial assessment of the French economy included a look at the domestic political situation, in an attempt to determine the likely economic impact of the May 2017 French presidential election. Over six months on, and following last weekend s Republican primary, we revisit this question. Here we shall consider the latest polls and developments in order to draw conclusions regarding the likely next president and what this will mean for France. 2

3 We believe that the second round of the French presidential election in May next year will be a race between Republican candidate François Fillon, and Marine Le Pen of the National Front (FN). Fillon was declared the winner after the second round of the Republican primary over the weekend, while Le Pen announced her candidacy some time ago, representing the National Front. The only other significant party are the incumbent Socialists, however it is highly unlikely that their current candidate, the French president François Hollande, will make it through to the second round next May. His approval ratings recently came in at just 15%; a record low. His centre-ground dithering has alienated the leftist segments of his own party, and his failure to solve France s economic and social problems, even after almost five years at the helm, have deterred many who traditionally identify with his party and their ideology. Looking then at polls specifically for the second round of the presidential election,* it looks likely to go in Fillon s favour. Of the three polls conducted this year, all see Fillon beating Le Pen with a consistently high 63-65% of the vote. Bookmaker Bet365 has recently made Fillon the favourite to win the presidency, with odds of 4/6. Here, following the recent confirmation of Fillon as the unexpected Republican candidate, and with global attention on Le Pen following the recent US election of Donald Trump as president, we shall look for each at what their chances of entering the Élysée Palace next year are. We shall also look at what it ll mean for France, in particular the French economy, should either candidate win. Following on from our initial report, we will focus here on whether next year s likely winner will be capable of turning the tables on France s economic malaise, revitalizing the country and its economy, and making it once again an attractive environment for investors. The Republicans Not so long ago, François Fillon was very much the third man in the race to become the Republican presidential candidate; his victory over Nikolas Sarkozy and other challengers in the first round of the primary was unexpected. Yet the former prime minister then went on to easily see off competition from Alain Juppé in the second round, taking over twothirds of the vote. It s our belief that he is now on track for the Élysée Palace next spring. Fillon is a classic Republican centre-right candidate; economically liberal and socially conservative. In some ways, he s a riskier candidate and weaker opponent for Le Pen than the more centrist Juppé. With such an orthodox rightwing Republican candidate, some centre-ground and left-leaning voters may abstain in the second round. A conservative Catholic, Fillon is opposed to gay marriage, and has defended France s colonial past. Nevertheless, as already stated, we still believe that Fillon has a strong chance of victory. He s popular with his party s base, and is an experienced politician, having first been elected as an MP in 1981 at just 27 years old. His landslide primary victory is testament to his popularity, while the endorsements of both Sarkozy and Juppé should help to attract votes from their respective supporters, covering a significant range of the political spectrum. In a second round run-off between he and Le Pen, enough leftists are likely to come out and rally behind the more moderate of the two right-wing candidates in a lesser of two evils play, as they did during the regional elections of December 2015, and in the 2002 presidential contest. With regard to what a Fillon presidency would mean for the French economy, we are cautiously optimistic. He is campaigning on a resolutely free-market platform and seems to have many of the right ideas regarding how to get France on a path of higher growth. Inspired by Margaret Thatcher, he promises an economic shake-up and is vocally pro-business and an advocate of spending cuts and smaller government. He believes France s corporates should face lower taxes, funded by cutting civil service jobs and reducing benefits. With regard to France s rigid and inhibitive labour laws, Fillon has said he will do away with the 35-hour working week and will raise the retirement age to *Assuming it is indeed a contest between Fillon and Le Pen

4 He s sees such hardline economic measures as absolutely necessary, as he believes France to be in a state of bankruptcy. He s also committed to maintaining the open borders and free market of the European Union; indeed, he seeks deeper integration post-brexit. A long-time Russophile, he is keen to improve relations with Putin, and has advocated a removal of the current economic sanctions, which would benefit French businesses. Fillon believes in a pragmatic approach to diplomacy and France s international relations. These views, however, mean he is likely to face significant societal resistance for any substantial reform attempts. His economically liberal and progressive stance contravenes that of many in France, including its powerful and wellpositioned unions, who are so dearly attached to their extensive welfare system and 35-hour working week. Fillon has said, however, that he is willing to stand up to and fight against the unions, unlike others who have attempted to instigate such change in the past. He said in a recent interview that the government must prepare for a showdown against the unions. He has also said that he will legislate by presidential decree in the aftermath of the election, thus bypassing Parliament, in order to deliver France its much-needed economic shock as quickly as possible. His rhetoric suggests he is truly serious about hardline reforms and getting them passed. His recent primary success, with an unexpected landslide victory, suggests that a number of French voters are starting to acknowledge the need for the major structural reforms Fillon pledges to carry out. The National Front Once a fringe movement, Marine Le Pen and her party, the National Front, have become an increasingly significant force in French politics. This is due to factors such as the failure of the Socialists to stimulate the economy, as well as the issue of migrants, and the spate of major terror attacks in France over the last few years. Le Pen is currently on track, according to the latest polling data, for a place in the second round run-off in the spring 2017 presidential election. Given the recent US presidential election, we should consider that an outcome once considered unlikely can quite quickly become a reality, and also that the reliability of polls, which still have Fillon as the favourite, is questionable. However, the rise of FN should not be overstated. Short of a significantly destabilising event, such as another major terror attack in France, we believe Le Pen is still likely to lose to Fillon. This is largely due to the point, already made here, that left-leaning and centrist voters are likely to rally around Fillon, as the less extreme option in the run-off. We should also be careful about drawing too many parallels between France and the US; there are many crucial differences between the two countries electorates, candidates, and electoral systems. France generally has a much higher voter turn-out than the US (around 80% rather than 60%) and the French electorate has far more socialist, left-leaning roots; people who would be loath to vote for a party like FN. Also, the selection of Fillon in the open primary, who won a landslide victory over Sarkozy who campaigned on populist issues and immigration, suggests that French voters are not falling prey to the same nationalist sentiments as the US voters who elected Trump. Trump was ultimately a representative of the Republican party, who have governed the US for much of its history; FN have never been in office. It s also the case that unlike Trump, Le Pen s electoral appeal has already been tested, in the regional elections directly after last November s Paris attacks, when they performed far worse than had been widely expected in the second round. Fillon is not surrounded by scandal; something his US counterpart Clinton could not seem to shake. It s also the case that France does not have the electoral college system like the US, which ultimately worked against Clinton, while it does have a two-round system, which is likely to benefit Fillon, as those who vote Socialist, or for Macron, in the first round are likely to then choose the more moderate candidate if they also vote in the run-off. 4

5 That said, there s still a chance that Le Pen will win; the lessons of 2016 have told us that we should certainly not rule out the unlikely or unexpected. And even if she s not elected president, Le Pen may still succeed in altering the discourse in France regarding the issues that any government would need to address. Indeed, she already is. The economic policies of Le Pen and FN therefore require genuine consideration for those monitoring the investment climate in France, and in the EU more broadly. The policies most commonly associated with Le Pen, and indeed those on which the FN party was founded, are nationalist and anti-immigration. She has said numerous times that she will hold a referendum on France s membership of the EU if elected president. This is perhaps the main, and the most controversial, campaign promise she has made so far. The consequences of this would, of course, be huge. Europe is currently still trying to work out what exactly the impact of Brexit will be, when it actually occurs. And France is a far more integral member than Britain; a founding state, part of the currency union, a major driver of overall EU policy. If France were to leave too, it s hard to see how this could not be the deathblow for the EU. This would then lead to a very high degree of uncertainty and instability for Europe, in the economic realm and beyond. The devaluation of the currency would provide a welcome boost to French exporters, but at the same time it would be problematic, as around two thirds of France s vast sovereign debt is held by foreign investors, who may be unwilling to roll it over following a Frexit. With regard to other international relations, in the current global environment Le Pen may in some ways be positive for France. Previously extremely skeptical of the US, following Mr Trump s recent election she has been very congratulatory. She has also been vocal in her praise and admiration of Vladimir Putin, and like her rival Fillon she sees Russia as a suitable partner for France, particularly when it comes to fighting IS. She too is likely to end the European economic sanctions on Russia, which would be positive for many French and European businesses. Le Pen received a EUR 9 million loan to her party from a Russian bank said to be close to Putin. Looking specifically at domestic economic policy, Le Pen proposes to solve France s problems with a series of classic leftist measures that are the opposite of Fillon s. She has championed anti-austerity and public services, spending more on which is ill-advised for debt-laden France, as well as anti-globalisation and protectionism. She opposes freetrade, which is also likely to prove economically damaging for France in the long-run. She generally seeks more control for the government in areas from healthcare and transport to banking; regarding the latter she has advocated the nationalisation of French banks. On labour laws, she has called for more workers rights, criticised reform efforts and discretely supported protests against the much-needed measures. Despite being generally negative for the French economy, such policies are traditionally popular with the majority of French society and, with enough legislative backing, she is likely to succeed in implementing them should she be elected as president next May. There are elections for the National Assembly at around the same time as the presidential contest, and there have only been three occasions when the French president s party has both failed to either win a majority or to form a coalition with smaller parties. Conclusion As stated in our April report on the French economy, we believe the best way forward for France indeed, its only real chance to become strong and attractive again - is business-friendly tax rates, a reduction in public spending, and to pass structural reforms such as those amending the labour laws. It also seems that, for the time being at least, remaining within the EU is the most prudent path. It s clear that it is Fillon, and not Le Pen, who offers the greatest chance of achieving this. There are still, of course, variables and uncertainties, and so the political situation should be monitored closely over the next six months. There s certainly no reason to celebrate just yet, but it does seem to be the case that France s most likely 2017 president is also its best chance at economic recovery. 5

6 HONG KONG Level 19 Two International Financial Centre 8 Finance Street Central Hong Kong Tel: Fax: SINGAPORE Level 39 Marina Bay Financial Centre Tower 2 10 Marina Boulevard Singapore Tel: Fax: AUSTRALIA Level Collins Street Melbourne Victoria 3000 Australia Tel: Fax: For further information on this report or our other research, please contact: STRATEGIST Amy Reynolds amyreynolds@aptcapitalmanagement.com Other contacts: CHIEF INVESTMENT OFFICER Simon David Allen simonallen@aptcapitalmanagement.com MEDIA ENQUIRIES mediarelations@aptcapitalmanagement.com INVESTOR RELATIONS MANAGER Amy Chen amychen@aptcapitalmanagement.com Copyright 2016 Apt Capital Management Limited. All rights reserved. This report was prepared by Apt Capital Management Limited from sources believed to be reliable. No warranties are made to the accuracy of information contained in this report. The content of this report is provided as general information only and should not be taken as investment advice. All content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed in this report are solely the opinions of the author(s) and do not necessarily represent the opinions of Apt Capital Management Limited. Apt Capital Management group companies may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis in this report is your responsibility. Consult your investment adviser before making any investment decisions. 6