The French presidential election is widely considered to be the pivotal political event of 2017, in Europe at least. Marine Le Pen wants to destroy the euro, while Mr Fillon and Mr Macron want to reform the French economy to save the single currency.
It is possible that the French economy will continue to surprise regardless of who wins, pushing the stock market higher. The recent data has been very positive. France has ranked first for six years running in an important survey for small technology companies (Technology Fast 500 EMEA, Deloitte). In the latest report for 2016, France extended its lead over second place, held by the UK. This comparative edge could be feeding through to the economy despite the high taxes and labour market rigidities.
The euro may continue to come under pressure from the strong US economic data. The jump in today’s ISM manufacturing new orders index for December (+7.2 pts to 60.2) underlines this point. Bond yield differentials will widen in the short run. A breach of parity is certainly possible. Nevertheless, it is easy to forget that on some key metrics (investment in intellectual property as a share of GDP), France is ahead of the US. Better economic data out of France will eventually put a floor under the euro, given the size of the current account surplus run by the Eurozone.
Summary
- Fast-growing tech companies to underpin recovery
- Political risks may be exaggerated
- Current account surplus to put floor under euro
