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Why Should the French Presidential Election Be Important to Investors?

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RANDY FREDERICK: After lagging the U.S. for a long time, the Eurozone’s economy is in its best shape in years. But several key elections on the horizon threaten to change all that. Jeff Kleintop, Schwab’s chief global investment strategist, joins me for the February 27 Schwab Market Snapshot to discuss the French presidential election, and how its results could impact investors. Welcome back, Jeff.

JEFF KLEINTOP: Thanks, Randy. Great to be here.

RANDY: Well, Jeff, we’re less than 45 days away from the first round of the French presidential election. Could you tell us a little bit about this election, and why is 45 days so important?

JEFF: Sure. Well, the stock market seems to have confidence in an uneventful outcome to these French elections. But the polls proved pretty unreliable in 2016, and that is I think what the markets are basing their confidence on. Look, remember this name: Marine Le Pen. If Le Pen wins the French elections, it could lead to a crisis that could spillover across the world’s markets. She wants to move France out of the Euro and redenominate the country’s debt in Francs. Now, that’s a big potential shock to the world’s financial markets. Remember, France is the world’s third-largest borrower. There’s a lot of debt in the world’s financial system. So that’s potentially a very big deal. And this 45-day timeframe you mentioned also a big deal. This is the timeframe when stocks began to slump ahead of those U.S. and U.K. votes last year in 2016. They fell 5- or 10 percent during that period of time. Of course, they rallied after the vote outcomes were known, but we’re now in that window where stocks begin to slide ahead of an uncertain election outcome.

RANDY: Well, I suspect most U.S. investors probably don’t pay much attention to French politics. But this sounds like another step in the emergence of global populism. So what risk does this election pose for investors?

JEFF: True, but this could be a big step. Look, the VIX right now—the Volatility Index in the U.S., Europe, elsewhere—near 10-year lows. So the markets aren’t pricing in a potential major crisis right around the corner. That worries me just a little bit. So, you know, I think stocks in France and maybe elsewhere could slump a little bit in the months ahead, but the odds of a prolonged decline related to a “Frexit” are fairly low. And here’s why: A Le Pen win—yes—potential for a crisis.

But, look, the National Front has a passionate but very limited base of support. So she will probably come out on top in that crowded first round of voting, but she’s unlikely to win enough support to win the second round. We saw this back in 2015 in the regional elections when the National Front won many first rounds; didn’t win any second rounds. Also, in France’s senate, the National Front currently only holds two of 348 seats. So they would have to do very well there to really pick up enough seats to enact any of that agenda. So there are a number of pretty big hurdles to a Frexit and a prolonged market downturn.

RANDY: Well, I know far-right parties have actually been gaining ground in other countries, too. So can you tell us about the other European elections scheduled for 2017, and do they pose similar risks to investors?

JEFF: Well, they pose less risk to investors. The Netherlands’ elections, the nearest one coming up, that’s on March 15, you can pretty much ignore that one. You might get an anti-EU kind of far-right government come and do—a winner of that election, but unlikely to be able to form a government and really make any substantive changes. The German election will be in September. Merkel is likely to win a fourth term, so status quo outcome. Italy may hold an election this year, though they don’t have to until next year. But they’re probably only going to hold it this year if it looks like it will be a status quo outcome. So, not a major threat from some of the other elections, although we do want to pay attention to them. Europe’s economy is doing the best it’s done in years, as you pointed out upfront, it’s not immune. It may be insulated, but not immune from some of these political risks. And I wouldn’t at all be surprised to see a little bit of a slump in both the French markets and maybe globally in the next coming months as we near that French election.

RANDY: As always, Jeff, thank you for sharing your expertise with us. That’s all the time we have for today.

If you want to read more from Jeff, you can do that in the International Investing section of Schwab.com. You can follow Jeff on Twitter @JeffreyKleintop and, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

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International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Definitions:
The Chicago Board of Exchange (CBOE) Volatility Index (VIX) is an index which provides a general indication on the expected level of implied volatility in the U.S. market over the next 30 days.

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