Barring a significant polling shock in the second round of the French election, Macron winning the French presidency would seem to usher in a new era of confidence for risk assets. We are not so sure.
Beyond the brief respite from political worries, the positive case rests on the current state of global growth: it is broader, more robust and more sustainable than at any point since 2008. Emerging Markets are a growing component of that growth, but even there the issues around balance of payments and commodity dependency seem to be less prevalent than they have been for much of the last few years.
The problem is how Central Banks react to this better landscape and the implications for the risk free rate of return. Hidden in all the excitement around the French election were robust Purchasing Managers’ Indices and earnings data across the Eurozone. A Macron victory may be the last piece of the puzzle for Draghi to begin tapering Quantitative Easing at the June European Central Bank (‘ECB’) meeting. Add to this a snap UK election, which if polls are correct will give the Conservatives a stronger majority, and we could see the Bank of England (‘BoE’) reverse the emergency moves it introduced after the Brexit vote last summer. In this view, we have a world with three of the major Developed Market Central Banks reversing the policy of the last decade.
So perhaps the change in the direction of travel from Central Banks is now upon us (in hindsight, it clearly wasn’t in December – the Federal Reserve (‘Fed’) raising rates matters little to global risk assets when other Central Banks start pumping harder in their place), which may mean more normal markets: a higher risk-free rate, Bond yields up from their record lows, and Equity markets reacting to bad news without an enormous bid waiting on the side-lines to buy the dip.