Ahead of the elections, redemptions from European equity funds exceeded $1bn for the sixth consecutive week to 2 May, according to fund flow data specialist EPFR Global. Bond funds haven’t fared much better.
Will the eurozone recovery been damaged by a detour from the austerity path? That’s a key question for investors to grapple with in the coming weeks with Francois Hollande’s successful campaign placing emphasis on embracing growth over austerity.
If Hollande is to succeed, he’ll need the support of Chancellor Merkel, who’s Germany has motored ahead of France in recent years.
As Ted Scott, director, global strategy at F&C, explains: “On the domestic front, France is an ailing economy that has lost over 20% competitiveness against Germany in recent years.
Bloated public sector
“Its economy is heavily reliant on a bloated public sector at 55% of GDP and, like the periphery countries, the unions are powerful with rigid labour laws making it difficult to implement the necessary reforms to improve competitiveness. Meanwhile, the deficit and debt ratios to GDP are unsustainably high and the economy is on the brink of recession with a current account deficit.”
Ironically, Scott believes that the French and Greek elections will bring forward a ‘solution’ to the eurozone crisis – whether that is a full fiscal union or partial fragmentation.
So what do investors make of the eurozone chaos? Interestingly, a poll by Fitch Ratings found that little more than half (58%) of European fixed income investors see the eurozone fiscal compact – signed by all member states, except the UK and Czech Republic – as positive but marginal in solving the crisis across the continent. 17% view it as an irrelevance, while 71% said they believe fundamental credit conditions will deteriorate.
Still, while no party could manage a majority in Greece, the country would have remained a basket case no matter the result. For France, perhaps Hollande will be successful in clearing a new path for growth; after all he is certainly not the only anti-austerity voice in Europe, as David Cameron knows too well.
As Andrew Morris, managing director of Signature, Rowan Dartington’s discretionary division, puts it: “His [Hollande’s] victory, like the others shows the growing dissatisfaction of the status quo among Europe’s electorate. Indeed having pre-empted his victory in becoming leader of the second largest country in the eurozone, a number of leading European figures had increasingly softened their ‘austerity above all else’ stance over the preceding weeks.”