The market reaction to Emmanuel Macron's victory in the French presidential polls is going to be extremely muted as most had priced it in, Anil Ahuja, chief executive officer of IPEPlus Advisors, told BloombergQuint in an interview.
Macron's victory also strengthens the case for the U.S. Federal Reserve to hike their interest rates in June, Ahuja said.
Here are edited excerpts from the conversation:
With Macron's decisive win, the fears of a Euro zone break-up will probably recede, at least temporarily. Given that the polls had already predicted his victory, how do you expect the European Markets to react?
I think there will be an extremely muted reaction because unlike the other polls before which is the Brexit or the Donald Trump victory, in this case the polls had been predicting a 60-40 split on the vote which shows that the outcome was already well known and well managed by the market just after the first round of the elections.
So, the likelihood of a Le Pen victory was almost nil. In fact if you looked at the options data on Friday before the weekend, you could have bought options on the euro for very little, I mean if you would have placed your bets on a Macron victory, you would have got very little in return. So that markets had already factored it in and I think we expect a very very muted reaction from the market. Pretty much an expected event.
So what does the Macron win do to the European Central Bank (ECB) and its policy then?
I think the complications will start now. If we draw a comparison with Trump who has walked into the White House with little or no political background but he has still gone in there as a Republican candidate who controls the White House, the House (of Representatives) and the Senate, and they are still struggling to get stuff passed.
If you look at Macron who has absolutely no political backing, and a parliament where he has no members, how does somebody like that who is an independent, actually bring these guys together and get them to pass any sort of logical policy which can take France forward?
So I think that is the single biggest risk in France. The ECB will work normally because they will assume that they have France and Germany surely in their camp which means that they can continue to do what they have been doing over the past many years.
Even if we talk about the currency markets, the euro has surrendered early gains against the dollar, but it still continues to trade near its November high. Do you really see this event leading to the euro extending its gains over the coming months?
Coming months is very difficult to predict in the currency market, but I do not see this event having any impact on the euro, because if it had to have an impact, it would have had one already.
Where do you see the next set of global risk coming from and in that backdrop, what kind of an upside do you see is left for the emerging markets?
I think this Macron win only solidifies the likelihood of a June rate hike for the U.S. Federal Reserve. I do not believe there will be any financial error, financial event which will cause a general problem across the globe, because I think the central banks are all over it, so they will make sure that nothing goes wrong on the financial side.
I think the only real risk is a geopolitical one, which frankly nobody can predict, and I hope it doesn't happen. So barring a geopolitical event, I don't think we're going to have a trigger which will cause a fallout of any serious magnitude. Of course there will be minor corrections this way-that way, but everything will be attrition over time and not, you know something that will happen in a knee-jerk way.
Talking specifically about India, you know off late if you see from the month of April onwards, foreign investors have been net sellers of Indian equities, after that significant buying that we saw coming in during the January to March period. Any thoughts on what could be spooking foreign investors and your thoughts on the Indian market?
I actually don't think the buying was in the January-March quarter, I think the buying was in March, because there was a change in tax law which kicked in on April 1. A lot of investors were trying to grandfather their investments, so anything that has come in before March 31, essentially carries the zero capital gains tax provision.
So, anybody who was planning to make an investment in March, April and May-June would have advanced that investment into March. So I think once that has gone away, there is no real impetus for people to put money in. All that money seems to have gotten pulled forward into March.
At current valuations, I'm not surprised that we see the FIIs continue to trim their positions. They haven't sold aggressively but they are net sellers, absolutely.
The themes that you like in India right now, where would you put your incremental investments?
I think the financial theme continues to be a solid one, and anything that has to do with consumer demand as well as government spending are all solid themes at this point in time.
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