zerohedge.com / by Tyler Durden / Apr 21, 2017 10:30 AM
Ahead of the first round of the French elections on Sunday, Deutsche Bank’s equity strategist Sebastian Raedler again reminds his bank’s clients and the seemingly unperturbed markets, that despite the tightening of the poll numbers among the four front-runners, European equities show little sign of pricing in a meaningful political risk premium. In fact, as he notes below, European equities appear to not have priced in even a modest political risk discount.
This may be a mistake. As a reminder, if we look at the last 3 polls run by those pollsters then the spread between the four candidates is at an average of 4.5%. Macron’s average is 23.3%, Le Pen 22.3%, Fillon 19.7% and Melenchon 18.8%. So it’s quite possible that these 4 candidates will be clustered together given that the spread is within the margin of error from previous elections (see “Is A Le Pen – Melenchon Second Round Possible: A Concerned Deutsche Bank Answers“).
Meanwhile, as equities fell 8% ahead the UK referendum last June and 4% ahead of the US elections in November, they have remained close to their recent highs this time around – and now trade around 3% above the fair-value levels suggested by DB models. European banks have also held up well despite falling bond yields, with their price relative around 5% above the level implied by the German 10-year yield.
Raedler further notes that Deutsche Bank expects only moderate upside for European equities in case of a Macron/Fillon victory in the second round on May 7th (~3%), moderate downside in case of a Mélenchon win (~3%) and significant downside in case of a Le Pen victory (~15%).
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