Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are currently focusing on, and our thoughts on the issues of the day.
Markets breathed a collective sigh of relief this week following the first round of the French Presidential election. The contenders have been whittled down to Macron and Le Pen, thus avoiding two “market-unfriendly” candidates battling it out in the second round on May 7th. The polling suggests that Macron should be the comfortable winner of the run-off with around 60% to Marine Le Pen’s 40%. European equities rallied strongly on the development and French bonds were also in demand. Markets are now fully pricing in a Macron victory and most experts are struggling to see how Le Pen can recover from what is a very weak position. This takes away what some saw as an existential threat to the single currency and, following the Dutch election, this would seem to constitute a halt to the populist wave in elections. We think Macron will indeed be successful but would caution against too much confidence. Le Pen’s support is much more committed and less likely to fail to vote and this, coupled with a low overall turnout, would make things interesting - you just never know. The first round verdict certainly does not tempt us back into the region just yet – the Macron win is priced in, Europe is vulnerable to a general downturn and the Italian general election (within a year) was always a greater risk than France’s Presidential vote. Undeniably, the risk here is diminished but our reasons for removing direct European exposure were multifarious and we hold off for now.
President Trump promised a “big announcement” on tax (we hoped “bigger” than his vocabulary) and markets approached the week in optimistic mood following the French vote. Frankly there wasn’t much detail in the plan beyond what we saw on the campaign trail and following the election in November, so it’s not entirely clear what the economic team have been working so hard on! The proposed cut in corporate tax to 15% is still exciting Wall Street but there is no real explanation of how this will be funded – the White House has refused a proposal for a 20% rate funded by an import tax. Treasury Secretary Mnuchin has suggested “higher growth” will pay for the cut but this seems rather hopeful. Repatriation of monies kept abroad by US companies continues to attract attention with a reduced rate to be introduced (perhaps 10%) to encourage money to be brought back onshore. There are undoubted positives to be had if that comes about. Again though, we have no insight into how this will be funded and some estimates suggests that over a 10 year period the proposals overall could add between $3 and $7 trillion to the budget deficit. Can we really expect these proposals to make it through a Congress which has already shown itself to be deeply divided over the failed attempt to repeal healthcare? Again, markets are in “benefit of the doubt” mode and a protracted stand-off between Republicans and Democrats, or even between different factions of the Republican Party would certainly be a cause for concern.
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