French Connection: What An Election Means For ETFs

France, the eurozone's second-largest economy behind Germany, will be holding one of the developed world's most widely watch national elections this year. Later this month, French voters head to the polls with the expected outcome being a May run-off involving far right candidate Marie Le Pen.

Amid last year's wave of populism that saw Brexit become a reality and Donald Trump win the U.S. presidency, there was some speculation earlier this year that Le Pen could win the French election, a notion that gave global investors some pause about French assets.

While it appears Le Pen will find her way to the May run-off, most polls indicate she will lose. That is the preferred outcome of the global investment community, and as that outcome has become more probable, French assets are responding.

ETFs Respond In Anticipation

For example, the iShares MSCI France Index (ETF) EWQ is up 6.6 percent year-to-date while the SPDR EURO STOXX 50 ETF FEZ is higher by 7.7 percent.

The $2.78 billion FEZ allocates 35.6 percent of its weight to French stocks, the ETF's largest geographic by almost 200 basis points over Germany. Investors should note it is unlikely Le Pen will be vanquished in the first-round election scheduled for April 23.

Political Caveats

“There is a caveat, however. If a candidate secures 50 percent or more of the vote in the first round, that candidate obtains the presidency and bypasses the run-off,” said State Street Global Advisors (SSgA) in a recent note. “This has yet to happen since the electoral process was implemented in the 1960s, but with weeks remaining before the first ballot, it may be an outcome that markets would be ill advised to write off just yet.”

La Sortie Française And Le Pen

Le Pen has publicly said she favors France departing the European Union, or a so called “Frexit.” That has investors jittery because the French economy has ample export exposure. Many of the French stocks residing in FEZ hail from export-oriented sectors, such as consumer discretionary, healthcare and industrials.

There are other risks to consider, particularly low voter turnout, a scenario that could help Le Pen in May.

“Higher-than-anticipated voter abstention rates would favor Le Pen. One model indicates that if 90 percent of Le Pen supporters vote and 65 percent of Macron supporters vote, it would give Le Pen the presidency with a 50.07 percent majority,” said SSgA. “With this election already expected to see the lowest voter turnout on record, abstentions may be seen as an implicit vote for Le Pen.”

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Inklings Of Upside To Come For This Europe ETF _________ Image Credit: Marine Le Pen, By Kenji-Baptiste OIKAWA, CC BY-SA 3.0, via Wikimedia Commons