Investment bank JPMorgan said in a note on Monday that a “significant” surge of inflows into European stocks would be spurred if far right French presidential candidate Marine Le Pen loses the election.
But how significant is that spur?
At least 10 percent of assets under management will flow back into the region’s stock markets after a Le Pen loss, JPMorgan estimated.
Marking up a loss of nearly 10 percent of assets under management, according to EPFR data, around $100 billion has flowed out of the segment since the beginning of 2016, it noted.
“We believe that these flows at least could come back into the region, should political uncertainty fade, in addition to any potential new net inflows,” JPMorgan said.
Shown to be a possible top pick in the first round of voting in France’s presidential election on April 23 by some opinion polls is Le Pen, leader of the far right, anti-European Union, anti-immigrant National Front party
Le Pen, who wants to pull France out of the euro zone, won’t win the second round of voting on May 7, even if she makes it past the first, believes a healthy majority of analysts and experts.
But, in line with political surprises such as Brexit and Donald Trump’s U.S. presidential win, fears abound over a potential dark horse Le Pen victory. And therefore fears of even a possible breakup of the bloc and a potential French exit from the euro zone, dubbed Frexit, have been stoked by that possibility.
JPMorgan didn’t expect that would weigh on European stocks, which have benefited from a weaker currency even though it noted that any “Le Pen loss” lap of inflows was likely to boost the euro.
“We think a stronger euro would not be an impediment for regional equities and, in fact, believe the euro will turn positively correlated to euro zone equities, no matter the election outcome,” it said.
The euro is typically seen as a vote of confidence in the region, it noted.
Market rally is expected to see a spur by a victory by either of the other two front-runners, Francois Fillon and Emmanuel Macron, says JPMorgan.
“Both are in favor of lower taxes, reduced public spending, and improved EU integration and are supportive of free trade,’ it said. “France ranks poorly on many fiscal and growth metrics and could benefit from ambitious structural reforms.”
But it wasn’t out of the realm of possibility, the bank noted, even while it considered a Le Pen victory unlikely.
A similar impact on markets as the 2011-12 European debt crisis, when around 20-25 percent of assets under management flowed out of European equities, would be had by a Le Pen win and euro zone breakup fears,, JPMorgan considered.
With the potential for a 10 percent earnings projection downgrade from its base case, Eurozone equities could potentially fall nearly 20 percent, if Le Pen wins, JPMorgan estimated.
Compared with current levels of around $1.0860, the euro would fall to $0.98, it also estimated. The bank’s base case is for the euro to rise to $1.15 by year-end following a Macron or Fillon victory.
(Adapted from Bloomberg)