France is the Eurozone’s second-largest economy behind Germany, so it stands to reason that global investors pay some attention to French politics. However, the national election being held in France this year is drawing more attention from global investors than usual.
The iShares MSCI France ETF (NYSEArca: EWQ), the largest France ETF trading in the U.S., is up about 1% this year and has traded in a tight range.
Some market observers are concerned about far-right candidate Marine Le Pen, who has been openly critical of Islamic fundamentalism.
“Looking to translate her high early poll numbers into votes, Le Pen evoked a frightening image of France’s future during her much-anticipated speech. The country, enslaved to the European Union and unrecognizable as French, risks losing its identity if the political status quo endures, she said,” according to the Associated Press.
While Le Pen’s lead at this juncture is enough to get her to the May runoff, polls indicate she would not win that runoff. She has also been highly critical of the European Union, calling it a failure.
“The French election adds to widespread anxiety about the future of Europe. It comes in the wake of the UK’s Brexit vote, the surprise U.S. election outcome and ahead of elections in the Netherlands and Germany later this year. French bond yields have soared to near five-year highs against German bunds, reflecting worries that the populist far-right candidate Le Pen could win the presidency,” said BlackRock in a recent note.
EWQ has $323.3 million in assets under management. The ETF is highly levered to the French export theme. For example, EWQ allocates a combined 37.6% of its weight to industrial consumer discretionary stocks. Financial services and consumer staples combine for almost a quarter of the ETF’s weight.
“French government bonds are reflecting the most anxiety over a potential Le Pen win, with the extra yield investors demand over 10-year German bunds widening to the highest level since 2012. We could see the spread widening out to more than two percentage points in the unlikely event of a Le Pen win, but falling back to 0.4% if she fails. European equity markets are showing more resilience—and given our view that political risks are likely overstated—we see more upside as global reflation and signs of stronger European growth give a much-needed boost to corporate earnings,” according to BlackRock.
For more information on the European markets, visit our Europe category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.