Macron’s first 100 days

Redacción - Viernes, 25 de Agosto

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Philippe Waechter, Chief Economist, Natixis Asset Management Since the beginning of Emmanuel Macron's mandate, we can identify four main points have to be kept in mind .A law on political transparency. Harsh negotiations on change of the labor code

• International recognition of Emmanuel Macron as a new but important comer on the international scene. It has first discussed with Angela Merkel on how to reform and improve institutions within the European Union and the Euro Area. It's also discussions with Donald Trump and Vladimir Putin in order to put France back at the top level
• A less ambitious program that the one announced during the campaign. The reality is more complex than what was expected. Some measures that were supposed to boost purchasing power as soon as 2018 will be taken later. There were some faux-pas on communication. This explains why Macron is down in polls. Except in international meetings (G20,…) he was not in the front row of the government action. It has been perceived as a weakness. More than that a large part of his support in May and June came from the fact that the majority of French people didn't want to have Marine Le Pen as president.

We can feel that this period has been a kind of trial and that the real start will be in September.

 

The structural reform on the labor market will be announced by the government on August the 31st. It's the main economic reform in Macron's program when he was candidate to the presidential election. It means that we will have a complete view on what his real strategy of reform is.

 

His recent trip in Austria and in different central Europe countries is interesting on this specific point. He discussed on "detached workers". These are workers of a country in the European Union that can work in another country of the EU. It was supposed to be a source of improvement with the single market framework. The wage is paid by the country where the worker will work but charges will be paid in his native country. This can create bias in competition as these workers can be perceived as "cheaper" than local workers due to this mechanism on charges.

So Macron has discussed of these detached workers with authorities in Austria and in other central Europe countries. Two things to keep in mind

1 – He wants to reform detached workers rules in order to improve the competition on the labor market and to keep it equitable and balanced between countries. This point is important at a moment where his government will present the reform on the labor code. He wants to change rules in France but he rejects bias on competition that could be non-equitable within the EU.

This step is important as the detached workers issue was important topic during the French presidential campaign. He is taking his responsibilities in saying that there is a need of greater homogeneity on the labor market.

He will also have to explain the reform to the French people. French people have voted for him and this reform so he will have to explain it

2 – The second point to keep in mind is that during his campaign he said that Europe has to protect European. It is not a lieu of battle and detached people can be source of fight. Competition is hard with countries outside the European Union so there is a need for a greater homogeneity in Europe in order to improve the way Europe protects people. That's the main reason for him to change rules about detached workers. It will be seen as the start of reforms Emmanuel Macron wants to accomplish in Europe. It's also a way to count countries that are ready to make efforts for reforms.

 

In his debate with Marine Le Pen before the second round of the presidential election, Emmanuel Macron said that he would first start with the law on political transparency but that his main tasks would be twofold. One on reforming the French economy through the labor market, one by improving the way Europe works. We are at the heart of his program and the real start is now.

 

 

Igor De Maack, Portfolio manager and spokesperson for the management team, DNCA Investments

Emmanuel Macron’s first 100 days have been marked most of all by the control he has taken over the French institutional system (with a majority in the National Assembly). This should allow him to push through a number of laws and decrees (through executive orders notably on job-market flexibility) to enhance the French economy’s competitiveness and free it from some of its institutional roadblocks. The 2018 budget is scheduled for submission on 20 October 2017. It should be approved no more than 58 days later, based on historical experience. It is expected to contain five flagship measures: a phase-out of the residency tax by 2020, the restoration of a flat tax for financial securities income, a hike in the CSG tax rate, the elimination of unemployment and health-insurance dues for company employees, and the replacement of the wealth tax with a tax on real-estate wealth only. Other measures will be discussed, such as further cuts in the corporate income tax. All these measures will come at a fiscal cost in the short term, which should mean that France will fail to stay within the EU’s 3% deficit cap. France will therefore have to make some spending cuts to be credible when it asks Germany to go along with a change in how the euro zone operates (with a transfer of German revenues and surpluses to distressed countries, autonomous economic governance for the euro zone, and gradual federalisation amidst a tense security and migratory environment).

Macron’s coming to power has resulted in a clear improvement in France’s image with international investors. Its youth and modernity are undeniable advantages, although for the moment these two qualities are more image than reality. Even so, in today’s world, Macron’s mastery of language and the smooth handling of his Facebook/Twitter profile are key (given Donald Trump’s setbacks). If the measures are implemented without being watered down to insignificance (this happens a lot in France), if unemployment continues to decline (potentially to 8.5% by 2018), and if economic momentum hangs on in the euro zone (growth could approach 2% in 2017), this five-year presidential term could transform France from an “old Europe” country bogged down in its depleted welfare state to a nation led by a dynamic forty-year-old leader with a rightist government that is (sort-of) free-market oriented.

 

Francois-Xavier Chauchat, Chief Economist and member of the Investment Committee, Dorval Asset Management

Macron’s first 100 days and the negative performance of European equities

 

Judging by the market action in Europe since early May, the election of Emmanuel Macron was an opportunity to sell. The DJ Euro50 equity index registered its highest point of the year on 8 May – i.e. the day after the second round of the French presidential elections – before losing -6% within the first 100 days of Macron’s mandate. Exactly the same thing happened to the French benchmark, the CAC 40. These disappointing performances stand in sharp contrast with the enthusiastic reception of Macron’s election by the vast majority of observers, from both Europe and abroad.

 

But just as it would be fool to award the merit of the fantastic performance of Wall-Street to Donald Trump, it would also be unwise to blame Emmanuel Macron for the recent poor performance of European stocks. Macron’s first 100 days have indeed delivered roughly what should have been expected. Although Macron’s economic policy provides investors with little reasons for excitement, there is not much either in it to scare them. The French president’s main focus is clearly on the European agenda. In exchange of Angela Merkel’s support for more integration and solidarity within the euro area, the new French government has taken a tough stance on public spending, and has prepared a new labor market reform. Since the economic recovery is now well under way – with France’s GDP growth expected to surpass 1.5% this year and next, for the first time since 2011 – this road looks practicable. And indeed, the 10-year bond yield spread between France and Germany has declined to just +30 basis points, versus +75 basis points in April.

 

What went wrong with Europe’s equity markets then? Mainly two things. First, since the Brexit vote of 23 June 2016 and up to Macron’s election, European equity markets had successfully climbed a “wall of worry”, delivering an outstanding performance of +33% since early July 2016. Even though Emmanuel Macron’s election was and remains great news for the euro area, profit-taking was to be expected after such a long and breath-taking bull run.

 

Secondly, the good news in Europe and the less good news in America have eventually given rise to a sharp appreciation of the euro. In dollar terms, thus, European equities have continued to make new highs, and have done as well as Wall-Street since May. But in local currency, Europe’s equity markets have logically suffered from the negative impact of the 10% rise in the euro-dollar on exporters’ profits. With the median equity P/E of the euro zone now 12% below that of Wall-Street, against only 6% on 8 May, we believe that Europe’s recent de-rating should end soon. But in the short-term a lot will depend on the behavior of the US dollar, a behavior that will in part depend on a far less predictable new comer on the international stage than Emmanuel Macron – namely, Donald Trump.

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