Back in January I did a quick poll of my colleagues to gauge the mood around some possible, if not probable, event risks for the year ahead. While making precise predictions is not easy, we know that things that are good for you rarely are! Gauging probabilities now gives us a yardstick to look back on over time to reassess if we think likelihoods have changed (see Chris Jeffery's post on our team's approach). The results of my survey are below:
While none of the scenarios garnered an especially high probability, the spread was still telling. ECB tapering before year end was seen as the most likely, given a probability of approximately 25%, followed by the UK not triggering Article 50 by its target date of 31 March 2017. While both of these were seen as more likely, they were also deemed to be less likely to impact markets, probably because their occurrence would be well sign posted and hence anticipated by markets in advance.
At the other end of the scale, not triggering Article 50 by year end was deemed least likely with a probability of below 10%.
Of all the risks on that list, there is one that stands out as feeling most pressing in the short term. Marine Le Pen is currently leading the polls in France, with voters due to cast their ballots on 23 April. If she is elected, her opposition to France’s membership the EU could set off a domino effect (arguably already started by Brexit). If Le Pen reaches the Élysée Palace, the euro could be heavily impacted.
We have talked about adjusting our probabilities of events unfolding as news develops, and this is a case in point. From here we are going to be assessing the political developments in France closely. Betting odds for a Le Pen win have moved from around a 20% chance in January to around a 30% chance today, while the more centrist candidate, Emmanuel Macron leads at about 40%. Le Pen is not the only risk markets are worrying about coming from the French elections - far left parties are also garnering votes, with a coalition of leftist parties likely to do very well in the polls.
Our view is that we should seek to guard against such risks in portfolios, but that they also open opportunities when sell-offs are more drastic than warranted. As mentioned, the euro is likely to be buffeted by the political winds in France, presenting itself as a candidate for trading around the election when our views differ from the market consensus. European peripheral bonds have also been losing ground to German bunds in the last months and could present an opportunity if a Le Pen win or other European political risk is over-emphasised by investors.