When Jean-Claude Juncker made his comments about Theresa May following the now infamous dinner at Downing Street, it was interpreted by many here as a strong signal to Britain that the negotiations ahead will be tough. In the light of yesterday’s victory by Macron in the French presidential election we should view it more broadly.
When the Brexit camp won the referendum to leave the EU last year there was a very real risk that Britain was the first in a line of dominoes. It was feared that with the political extremes – left and right – apparently in the ascendency and a spate of elections imminent across Europe, others would follow.
Today the EU project looks safer. Holland and now France have resisted the pressure. Juncker’s recent dig at Britain might this morning be seen as a “them v us” ploy to shore up the pro-Union votes in France and Germany. If so, it looks to have helped.
As the French headed to polling stations at the weekend a Macron victory already looked secure – we saw a market rally after Macron pulled ahead in the first ballot and markets opened to the news of his victory with a small retrenchment.
There are still parliamentary elections in France to come in June and German elections in September. A feared summer of discontent in Europe seems less likely this morning but no-one is getting over-exuberant.
Economic conditions in much of the world are getting better. Business surveys and leading indicators of economic activity continue to improve and though markets generally are at record highs they continue to climb the famed wall of worry.
Supportive monetary policy is likely to continue in Europe a while longer. Little surprise that Europe appears to be investors’ most favoured region at the moment and reported European hedge fund data suggest that investors have reduced their short positions and the average net long position has moved to the top of the five-year range.
We are neutrally positioned on equities and take the view that, other than at extremes, valuation alone is not a trigger for asset allocation changes. Some of the short-term political risks in Europe have eased, but investors have already added to positions and Europe is now a consensus overweight. We have no plans to increase exposure to Europe further at this stage.
With the valuation of many equity and bond markets leaving little buffer if fundamental factors were to deteriorate, our approach is to focus to a greater extent on individual company strategies than on regional arguments.
But let’s not end on too cautious a note. The Macron victory should be welcomed – investors can dip their croissants in the hot chocolate for a little longer.
Published 8 May 2017
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