As French voters head to the polls, investors are grappling with a remote yet not implausible possibility -- victory for Marine Le Pen.
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The anti-euro leader of the far-right National Front is unlikely to triumph in the two-round presidential vote that kicks off Sunday. But few observers discount a win for Ms. Le Pen entirely, and analysts say it could pose a major risk to European equities and spur concerns over the future of the eurozone.
"It would be seismic, bigger than Trump or Brexit for markets, if Le Pen got into office and called into question the euro itself," said Paul Griffiths, chief investment officer of fixed income and multiasset at First State Investments.
Sunday's vote will determine which two candidates will face off in May's runoff, unless a candidate garners more than 50% of the vote. The latest polls point to a tight four-way race.
In her campaign, Ms. Le Pen has vowed to take France out of the euro and bring back the franc, which could cause the country to default on its debt while questioning the viability of weaker eurozone economies such as Spain and Italy.
Options trading suggests investors are bracing for large swings in markets across Europe next week and are buying protection against a steep move in the Euro Stoxx 50 index of eurozone blue-chip stocks.
The yield premium demanded to hold 10-year French government bonds over their German counterparts climbed to 0.73 percentage point this week before narrowing in recent sessions, compared with just 0.22 in September.
Concern has spread to the euro. The gap between the volatility that derivatives predict for the euro-dollar exchange rate and the current actual volatility of that pair climbed this week to its most extreme in a decade, according to Macro Risk Advisors.
In equity markets, attention will likely turn first to France's benchmark CAC 40 stock index, which has climbed roughly 4% this year. Its listed companies source 26% of their revenues from France and 61% from Europe as a whole, according to FactSet.
Companies with a larger share of overseas revenues, as well as more defensive shares such as consumer staples and pharmaceuticals, are seen as better positioned to weather any turmoil. French banks are seen as particularly vulnerable in the event of a political shock.
If Ms. Le Pen is elected, "you cannot imagine a German or Italian insurance company would keep their [money] in France," given the risk to the euro, said Philippe Waechter, chief economist at Natixis Asset Management.
Foreign-based investors own a large share of French debt, holding around 60% of government bonds. If they flee France, borrowing costs would likely climb, hitting French companies and the wider economy, Mr. Waechter said.
But the whole eurozone is likely to suffer, investors say, given questions over the entire project's future.
"It's the installation of huge structural risk and a lot of investors are just going to avoid it," said Michael Thompson, managing director at S&P Global Market Intelligence. Investors would instead likely move money back into U.S. stocks and bonds, he said.
Recent inflows into European equities from global investors could also make the region's shares more vulnerable to any surprises, some analysts say.
The eurozone is currently investors' favorite region for equities, with France the second most popular market in the region, according to Bank of America Merrill Lynch's April survey of fund managers. In the last month, the rotation out of U.S. stocks into eurozone equities was among the largest since 1999. That came even as political risk from the region was cited as the biggest tail risk for global markets.
"People are more optimistic about European equities than any time since the crisis," said Pravit Chintawongvanich, chief derivatives strategist at Macro Risk Advisors. "If you get this unexpected outcome, it completely changes your calculus," he said.
While estimates vary, analysts predict a roughly 5%-10% fall in eurozone equities in the event of a Le Pen victory. Some believe that while U.S. equities could also initially sell off, the declines would be much smaller and stocks would likely quickly rebound, much as they did two days after the Brexit vote.
To be sure, investors point to several major hurdles between Ms. Le Pen's election and a so-called Frexit. She would need support from the French prime minister to call a referendum on euro membership, which is unlikely unless she also wins a parliamentary majority. Around two-thirds of the French population still supports the euro.
Across Europe, markets have quickly bounced back from surprising political outcomes that had been presumed unfavorable for stocks. Italy's benchmark FTSE MIB Index has gained 16.2% since Italians rejected constitutional reform in December and handed populists a victory, compared with a 14.1% gain for the wider Euro Stoxx 50 over that time. London's FTSE 250 index has gained 11.7% since the U.K. voted to leave the European Union last June.
If a mainstream French candidate is elected, European stocks could be poised for big gains, given recent improvements in the European economy and corporate earnings.
"There's pent-up demand for European assets," said Mislav Matejka, equity strategist at J.P. Morgan. If the French elections don't result in a disruptive outcome, "this is the year for European equities," he said.