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MarketWatch April 2017

The Interview: French Presidential Election

zak_kacem_42x49px.jpg Zak Kacem
Portfolio Manager

MarketWatch sat down with Zak Kacem, portfolio manager at Davy Private Clients, to get his views on how the French presidential election will unfold.

MarketWatch: Who are the main contenders in the French presidential election?

Zak Kecem: There are four, maybe five, candidates who could potentially win out of the 11 that are running – Le Pen, Fillon, Macron, Hamon and Mélenchon. On the far right we have Marine Le Pen, the leader of the National Front party. On the far left we have Mélenchon. François Fillon is a Republican, which is a major centre-right political party. This is the party of former Presidents including Chirac and Sarkozy. Benoît Hamon is the 'official candidate' of the Socialist Party, the party of the departing President François Hollande. I am using the term 'official candidate' because there is also Emmanuel Macron who, until last summer, was a socialist minister for François Hollande and is now running as an independent centre candidate. Macron is gathering a lot of momentum and the latest polls show he is the front runner.

 

MW: After Brexit and Trump’s victory, investors are concerned there may be an anti-establishment vote in France which could lead to the break-up of the European Union (EU). Could we see such a result in the French presidential election?

ZK: I think it’s unlikely but French voters have a lot of the same concerns. Like in America and Britain, many French people are unhappy about jobs, security, terrorism and the migrant crisis. This unease is an ingredient which could make the thesis of the National Front appeal to a larger spectrum of voters. More so than in previous elections. The second reason is what I call the economic casualties. Lots of manufacturers, farmers and other small business owners have become much less competitive in the single market so, in today’s more globalised economy, I think going into this election these issues are at the top of people’s minds.

 

MW: François Fillon is the most experienced candidate and was tipped to win but has been plagued by scandal. Is he out of the running?

ZK: No. Fillon is not out of the running. He is third in the polls behind Macron and Le Pen. Let’s not forget that the Republicans are a major political party in France. Fillon won the Republican nomination against two big contenders: Alain Juppé, the Mayor of Bordeaux, and Nicolas Sarkozy, the former president. Fillon was the most radical of those three. If he can get through the first round, he could become president regardless of the opponent. This is because against Le Pen he will get the endorsement of the Left, and against Macron he will get the National Front vote.

 

MW: The National Front has never won a presidential election. What is different this time?

ZK: That’s right. Since the creation of the National Front in the early 70s we have had seven presidential elections. In each of these it was virtually impossible for the National Front to win because the combination of centre-left and centre-right political parties captured the majority of the vote. The thinking in each of these elections was simple - if you are not happy with the centre-left then vote for the centre-right and vice-versa.

This year is different. The centre-left is weakened as the departing socialist President, François Hollande, is unpopular for failing to deliver on his promises. The centre-right candidate, François Fillon, is in a difficult position because of allegations he gave jobs to members of his family and because his reformist agenda is considered by many to be an end to the French social model.

People should also realise that the National Front has been working hard to improve its image over the last number of years, particularly under the leadership of Marine Le Pen. She even went so far as to fire her father, the founder of the party, in order to enhance the party’s reputation. This rebranding of the National Front is commonly referred to as the “dédiabolisation” or “un-demonising” of the party. But I think many French people have long memories and will not forget the past that easily.

 

MW: Polls suggest Marine Le Pen will win the most votes in the first round. Could she possibly win the second round as well?

ZK: She could, but I don’t think she will. Pollsters did a poor job of predicting Brexit and Trump’s victory, but I don’t think we can discount them completely. The polls have been indicating Le Pen will win the first round but will lose the second round to Macron or Fillon.

The only other time the National Front made it to the second round was when Jacques Chirac took on Jean-Marie Le Pen in 2002. What happened then was that most of the left, despite their disapproval of Chirac, said “votez escroc, pas facho!” which means “vote for the crook, not the fascist”. Something similar could unfold this time. If Fillon makes it to the second round, I suspect most Macronists and Hamonists will vote for him. If Macron faces Le Pen in the second round, the latest polls suggest he will win.

 

MW: How do people in France regard the National Front and its agenda?

ZK: The National Front is a very controversial party in France. But there is no consensus opinion. There are all different points of view from ideological-driven loyal supporters, to opponents who see it is a threat to our democracy.

 

MW: Macron is a relatively new and unknown quantity. Could he win?

ZK: Macron is the youngest candidate and if he wins he will be the youngest president in the history of the Fifth Republic. He is a former senior civil servant and has also worked as an investment banker. Many have called him the candidate of money or the lobbyist representing the interest of major financial parties.

Overall, I think he made a smart decision to leave the social party and to go on his own. He can capture a good proportion of the left-wing vote, and at the moment he is front runner in the polls with about 26% of the vote. In contrast the official socialist candidate, Hamon, has only 11%.

Macron’s programme for government promises a number of changes to the state-sponsored welfare system to make it more adaptable to the new economy. There is also a lot to say about the persona of Macron. He is charismatic and a charming speaker. Some will vote for him because of the values he stands for, including respect for family. That appeals to many voters especially when you compare him to other French politicians such as the former IMF (International Monetary Fund) boss Dominique Strauss Kahn or three times married Nicolas Sarkozy.

 

MW: Could France pull out of the EU or the euro?

ZK: I’d describe the risk of "Frexit" as a low-probability, high-impact event. In other words, even if Le Pen wins, Frexit would still be a relatively low probability. Yet as a key member of the EU, the risks are so high that if Frexit did materialise it would potentially mean the collapse of the union.

Organising an exit out of the EU would be a much more difficult task than Brexit. The UK has always been a semi-detached entity of the EU, with its own national currency whereas France is a major pillar, and a founding member of the EU. In the event of a Frexit referendum, the country would likely be divided, and I suspect even those who voted for Le Pen would be split. That would mean it would be difficult for her to secure a Leave vote.

Re-establishing national borders and leaving the Schengen Area is clearly a pillar of her campaign but there is confusion on what Frexit really means. Would it mean pulling France completely out of the EU and the euro? Or would it mean staying in the EU while running a dual currency system whereby the euro is the currency for the state and corporations and a new franc is the national currency for the people? I just can’t see it happening.

 

MW: Does France still want to be part of the euro?

ZK: I believe the majority of French people understand the benefits of the euro and that the country clearly benefits from being in the single market. But we can also argue that the British and Americans were the architects of globalisation and this didn’t stop them voting for protectionist policies. Politics isn’t always logical.

More generally throughout the EU, anti- euro sentiment has increased since the crisis but I believe the majority of people still appreciate the benefit of being part of the bloc. The recent Dutch election is a boost for the pro-European campaign and shows that a lot of people still believe in the benefits of the single market and want to remain. I think the French people feel the same.

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