Investors have been eyeing developments related to the French election like a hawk, many still bruised and reeling from getting caught out by the outcome of the Brexit vote and US presidential race.
If Brexit and Donald Trump have taught the investment community one thing, it’s not to be complacent and to view the pre-election polls with a grain of salt.
On Thursday, France’s populist firebrand and leader of the Front National party, Marine Le Pen, was ahead in the polls with 23.8% of the votes, according to Bloomberg data.
Mainstream candidate, François Fillon, who months ago seemed assured of an easy victory, now trails in third place, behind wildcard Emmanuel Macron.
"Should investors make a defensive play or engage in a bit of risk-taking?"
Shock potential
With the potential for a shock still in the realm of possibility and with it, the stability of the EU project hanging in the balance, should investors make a defensive play or engage in a bit of risk-taking?
Partially, this will be determined by investment strategy and risk profile.
Even though Seven Investment Management does not subscribe to the view that because polling “failed” on Trump and Brexit, it could fail on Le Pen, it is still trimming European equity risk in its cautious portfolios and relying on Japanese yen as a diversifier.
Longer term gains
But for its more adventurous portfolios, 7IM remains “more comfortable running European risk” and is “prepared to stomach any market moved in the interest of longer term potential gains.”
“European companies are having one of their best periods for earnings since the financial crisis – growing revenues rather than cutting costs,” explained the group’s CIO Chris Darbyshire.
Still, the investment manager views political risks in developed markets as a key risk for equities, which is why it has maintained an overweight to gold and recently added US treasuries to provide “tail risk protection against uglier scenarios.”
Gary Kirk, a portfolio manager at TwentyFour Asset Management, said the firm is has a “measured amount of ‘fire power’” (i.e. cash) to buy on attractive weakness.
