Why Investors Will Watch TV Battle Between Macron, Le Pen

Is the rise of populism in Europe fading or is there space for a comeback? Many investors expect the French presidential debate Wednesday to provide some answers.

Far-right candidate Marine Le Pen's few remaining chances to clinch a last-minute victory in the second round of the French presidential election Sunday, investors say, will depend on her television performance. While research suggests the impact of debates is often limited, money managers see it as a potential pitfall for pro-business candidate Emmanuel Macron, who is leading comfortably in the polls but remains politically inexperienced.

"That debate will be key," said Holly MacDonald, chief investment strategist at Bessemer Trust, a New York-based wealth manager with more than $100 billion under its wing. Mr. "Macron is somewhat of an untested candidate."

Mr. Macron managed to hold his own against Ms. Le Pen during the first televised debate in March but shared the airtime with four other candidates. Conservative François Fillon and socialist Benoît Hamon have now backed Mr. Macron in a bid to defeat the far-right candidate. This, analysts say, severely dents his antiestablishment credentials.

In a note to their clients last week, U.S. bank Citigroup Inc. warned that the debate could swing votes toward Ms. Le Pen, who is "likely to focus her attacks on Macron's investment banking past, his establishment status, relative lack of experience, acceptance of immigration, globalization and the diktat of the European Union."

The importance of the debate in investors' minds can be gauged by the implied volatility of options offering insurance against future swings in the euro versus the U.S. dollar. Two weeks ago, as one-week contracts started maturing after the first round of the election, their implied volatility shot up to 0.17 percentage points from 0.07. But yet another rise happened when the options started maturing after the debate, going up to 0.2 percentage points.

The cost of insurance plummeted across the board after Mr. Macron came ahead in the first round on April 23 with 24% of the vote, against Ms. Le Pen's 21%. The CAC-40 stock index is up more than 4% since, and the extra compensation investors demand to hold French 10-year sovereign debt over German paper has fallen to around 0.5 percentage point, from above 0.7.

Yet, the spread remains double what it was before French election jitters started settling in and has slightly edged up again over the past week.

"I expect more volatility," said Nicolas Forest, global head of fixed income management at Candriam Investors Group, who highlighted the debate as "the big important event for markets."

To be sure, the widespread belief remains that Mr. Macron will have an easy win: Latest polls show he is set to win around 60% of the votes, a distance that is seen by most analysts as insurmountable.

Whether televised debates can deliver election swings has been thoroughly researched in the U.S. but remains unclear.

According to University of Wisconsin-Milwaukee professor of political science Thomas Holbrook, even though there is "pretty thin evidence" that debates steer election outcomes, they can sometimes "change the narrative" of a campaign.

In last year's U.S. presidential campaign, Democratic candidate Hillary Clinton appeared to get a boost in the polls after each of the three debates she had against Donald Trump, but she lost the election. Research for the 2012 campaign that pitted Barack Obama against Mitt Romney found that much of these moves aren't due to people changing their minds on who to vote for, but rather because the winner's supporters become more eager to answer pollsters.

"When you have three or four debates, typically the net effect tends to wash out," said Robert S. Erikson, professor of political science at Columbia University, but short-term effects can be more powerful, which in this case might work in Ms. Le Pen's favor.

"What could be interesting is how many people will watch the debate," said Didier Saint-Georges, managing director and member of the investment committee at Carmignac, a French asset manager with EUR56 billion ($61 billion) under its wing. "If viewing is very low, it could be perceived as a preview of a low turnout on election day," which could conceivably give Ms. Le Pen a fighting chance.

Even if wins Sunday, Mr. Macron could struggle to secure enough support for his upstart platform En Marche ("On the Move"), which is barely a year old, if he can't field strong enough candidates in the legislative elections in June. This could hamper his pro-market agenda, investors say.

Meanwhile, Ms. Le Pen's simple presence in the debate is "important, symbolically, in the long run," said Bastien Drut, strategist at Paris-based Amundi, Europe's largest money manager with more than EUR1 trillion under supervision, because it shows that Europe might grapple with anti-globalization parties for years to come.

When Ms. Le Pen's father, far-right firebrand Jean-Marie Le Pen, got through to the second round in 2002, his contender, Jacques Chirac -- who ended up winning with 82% of the vote -- refused to debate with him at all.

"15 years ago, this was unthinkable," Mr. Drut added.

--Riva Gold contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

May 02, 2017 05:45 ET (09:45 GMT)