The Afores Transfer 1.344 Billion Dollars to the Pension Fund for Welfare

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As required by the President of Mexico, Andrés Manuel López Obrador (AMLO), on Monday, July 1, his government began delivering the first pension supplements to retired workers.

The date was significant for the president and his administration because it marked the sixth anniversary of what he considers his historic electoral victory in 2018, and the start of an economic and social regime change known as the “Fourth Transformation.”

One of the initiatives promoted by the president a few months ago was the creation of the Pension Fund for Welfare (FPB), a state-managed fund that will be used to supplement workers’ pensions so that they can retire with 100% of their salary, up to a cap of approximately 932.10 dollars at the current exchange rate.

The first pension supplements were to be delivered on July 1, a promise that has been fulfilled.

These pensions will consist of the pension the worker receives from their individual account (replacement rate) and the supplement that brings their pension to 100% of their salary at the time of retirement, provided it does not exceed the cap of 16,777.77 pesos and pertains to the 1997 law generation.

Afore Transfers

In a statement, the Mexican Association of Retirement Fund Administrators (Amafore) reported compliance with the law requiring the transfer of resources to the Pension Fund for Welfare.

“As part of the process to carry out the transfer, the Afores, in collaboration with the authority, conducted a thorough review to determine which accounts belonged to people over 70 years old in the case of IMSS and 75 years old in the case of ISSSTE, and who had not contributed to social security for one year,” said the institution.

Thus, the total amount of resources sent to the trust established at the Bank of Mexico was approximately 1.34 billion dollars.

Amafore indicated that in the coming days, it will send a certificate of transfer of the resources from this sub-account to the last registered contact point of each worker.

Additionally, in the next month of September, an account statement will be generated with the latest movements under the Afore administration. Subsequently, the account statement delivered will include the performance reports of the Pension Fund for Welfare.

The Labor Market With Pre-Pandemic Numbers Brings Fed Cuts Closer

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The U.S. labor market continues to show signs of recovery, with a steady trend in job creation and a decline in the quit rate, suggesting normalization and cooling. This keeps the door open for rate cuts later this year, according to analysts.

Job vacancies increased to 8.14 million in May, which is above expectations. However, the trend remains a decline in vacancy figures as the U.S. economy moves closer to pre-pandemic levels.

The quit rate was the major warning sign of an imminent increase in labor costs that caused inflation to spike in 2021 and remain elevated since then. However, the marked decline in the quit rate suggests that the labor market is cooling, as companies are less willing to pay more to hire staff or workers themselves are becoming more reluctant to move.

Similarly, The Conference Board states in its analysis that “the modest cooling of the labor market in the second quarter, from heated to robust, should be welcomed by the Fed.”

Additionally, the weakening of consumer demand and, consequently, the growth of real GDP in the first half of 2024 should have brought some calm to the labor market, adds The Conference Board.

However, with no signs of a collapse in the labor market, the Fed can maintain a restrictive monetary policy to drive consumer inflation back towards the 2 percent target.

“We continue to forecast that the unemployment rate will peak this year below the natural rate of 4.4%,” says the study, which adds that inflation is likely to stabilize at 2% by mid-2025, allowing for a 25 basis point rate cut at each of the November and December 2024 meetings.

According to ING Bank, wage growth and inflation should continue to cool, keeping the door open for rate cuts later this year, states an ING Bank report.

Fed Chairman Jerome Powell, speaking at the ECB Forum on Central Banking in Sintra, Portugal, acknowledged that the economy and labor market have been strong, but that inflation is showing “signs of resuming its disinflationary trend” along with a “rebalancing in the labor market,” adds the report signed by James Knightley, Chief International Economist, U.S.

While Powell declined to provide details on the timing of any potential rate cuts, markets are now pricing in a roughly 75% chance of a cut at the September FOMC meeting.

“If we get another couple of core inflation numbers at or below 0.2% monthly, unemployment exceeds 4%, and more evidence of cooling consumer spending growth, we believe the Federal Reserve will begin to shift monetary policy from restrictive territory to ‘slightly less restrictive.’”

Guilherme Benchimol (XP) and Zest Want to Change the “Dress Code” of Private Banking in the Americas

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With the presence of Guilherme Benchimol, founder of XP, the top executives of the Peruvian company Zest formalized an alliance in Montevideo to expand into the onshore and offshore markets of Latin American clients, with one of their bases being the Uruguayan capital.

The giant XP, a technology platform that provides investment products to retail clients in Brazil, is now targeting various segments of Spanish-speaking Latin American clients, both locally and offshore. To this end, alongside its partner Zest and its new office in Montevideo, led by María Noel Hernández, XP will undertake a particularly challenging technological and cultural shift.

Entrepreneurial and Technological Culture

Wearing casual clothes and white sneakers, Benchimol, accompanied by Arthur Silva, founder of Zest, showcased a youthful maturity in Montevideo and began his analysis before a small group of bankers gathered at the Radisson Hotel. “In Latin America, the banking sector is very concentrated and does not provide access to good investment products for people. Our goal is to help people invest better,” said the founder of XP.

Created by Benchimol and his partner Marcelo Maisonnave in 2001, XP now has five million clients and manages 1 trillion reais. But that’s not all: the firm is currently the main vehicle for international fund managers, has offshore operations (with offices in Miami and the Cayman Islands), and in Brazil, works with a network of 20,000 independent financial advisors.

Through its fintech platform Rico, XP offers investment funds from firms like Baillie Gifford, BlackRock, Fidelity, Fundsmith, J.P. Morgan, and Vanguard. It thus makes available over 500 equity funds, 2,000 fixed income funds, 730 multi-asset funds, and 160 alternative funds.

Benchimol speaks to millennials, both end clients and private bankers, with a new “dress code” and language: “We are entrepreneurs, not account managers,” he says. “We offer infrastructure so that our network can serve their clients internationally.”

The 21st century begins with the dominance of technology companies over financial ones, a paradigm shift. It was only a matter of time before financiers like Benchimol joined the prevailing entrepreneurial and technological culture.

The word “trust,” central to traditional private banking, slips into the discourse, but XP’s competitive bet is on technology: “U.S. banks have heavy structures. Our dream is to serve American residents and bring them our culture, which consists of offering the best customer experience. We will do the same as we have done in Brazil, where we have been recognized as the best company for six consecutive years, ahead of Itaú and Santander,” says Benchimol.

“We Are Not a Bank, We Have a Bank”

XP’s innovative and technological identity is summarized in one phrase: “We are not a bank, we have a bank.”

But with its offshore structures in the Cayman Islands, Miami, and now in Latin America (Peru and Uruguay), we are talking about a true financial entity that particularly targets clients with international investments who want to move from onshore to offshore with a single click.

For its Brazilian clients, XP has managed to overcome regulatory and tax difficulties through technology, but as Benchimol says, “no client can resist a financial advisor who is empathetic and persistent.”

During the event in Montevideo, taking advantage of the B2B Summit for entrepreneurs, XP’s technicians and onboarding specialists demonstrated their mobile app, capable of “breaking down barriers and providing access to both Brazilian fixed income and U.S. Treasury bonds.”

With small print not suitable for presbyopia but adapted to millennials, the XP app is specially designed for retail clients starting from very low amounts and aims to reach financial advisors with equal efficiency. The promise of three clicks to be online and invest must translate into ease of gaining clients, overcoming regulatory barriers, and switching from the local market to offshore in seconds.

Zest, founded in 2016 by Arthur Silva, a Brazilian resident in Peru, is a young and small company now partnering with a giant to conquer, no less, the Latam market. The firm has an expansion plan with the opening of branches in Uruguay, Chile, and Colombia. With the support of XP Wealth Services US, it aims to reach 5 billion dollars in assets in the next three years and double its team. The adventure has just begun in this southern winter of 2024, perhaps marking the start of a new success story in Wealth Management.

AXA IM Repositions its Metaverse Fund to Cover a Broader Spectrum and Include Artificial Intelligence

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AXA Investment Managers (AXA IM) has announced the renaming of its AXA WF Metaverse fund to AXA WF AI & Metaverse, effective July 2, 2024. According to the company, this decision reflects the expansion of the fund’s investment universe to include the broader realm of artificial intelligence (AI) and the growth opportunities it offers as the AI revolution extends beyond the boundaries of the metaverse.

Commenting on the fund’s name change, Tom Riley, Head of Global Thematic Strategies at AXA IM Equity, explained that the management company “firmly” believes that the synergies between AI and the metaverse offer unprecedented opportunities, while also noting that the AI revolution extends beyond the metaverse. “While the existing companies in our portfolio have been at the forefront of AI innovations, by expanding our investment universe to include the broader AI environment, we believe we could capture even more exciting opportunities. By selecting one of the most significant themes of our generation, the fund can appeal to investors seeking exposure to this fast-moving sector and its growing set of credible long-term growth opportunities. The rise of AI and its possibilities have increasingly made it clear that its evolution is not just a trend or a parallel development, but a powerful accelerator of the metaverse,” Riley commented.

The management company highlights its established expertise in technology and disruptive technology, managing around 6 billion dollars in assets within these themes. The Metaverse strategy was launched in 2022 as part of AXA IM’s commitment to identifying and capturing the growth potential of disruptive technologies for its clients. The AXA WF AI & Metaverse fund will continue to be co-managed by Pauline Llandric, a technology portfolio manager, and Brad Reynolds, a technology portfolio manager, both based in London.

Asset Allocation for the Second Half of the Year: What Do International Asset Managers Prefer?

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After analyzing the perspectives that asset managers have for the second half of the year, it’s time to ask them about the asset allocation they prefer. We start from a market context that is still anticipating central banks to cut interest rates, especially the Fed. The fact that they have lowered market and investor expectations in this regard has created quite a bit of dispersion in identifying which assets should not be missed from now until December.

According to Dan Scott, head of multi-assets at Vontobel, the second half of the year presents some positive aspects: the resilience of the US consumer, China’s fiscal stimulus, and the incipient recovery of the eurozone contribute to a moderate but steady economic expansion that is likely to continue until the end of 2024.

“However, these positive prospects are not without risks. One of our main concerns is whether interest rates will remain too high for too long, ultimately causing some disruption. In the US, an increase in delinquencies on credit cards and auto loans is already being observed. The continued increase in provisions for bad loans related to the US commercial real estate sector is also a clear indicator that cracks are gradually appearing and will require a policy response,” warns Scott.

Fixed Income

This period of waiting concerning central banks makes one of the most complex allocations to make in fixed income, where durations and maturities have become key tools for investors. In this regard, Kevin Thozet, a member of Carmignac’s Investment Committee, highlights that in public debt, maturities up to two years are favored. “Longer-term rates could yield less, given the optimistic trajectory of disinflation and the increase in public debt at a time when monetary authorities are trying to make safe cuts and reduce their balance sheets. In credit markets, premiums are not far from previous or historical lows,” says Thozet.

According to the Carmignac expert, historically, the combination of low bond yields and low credit spreads has been disadvantageous for the asset class, but the current higher-yield environment means that credit spreads act as a boost to investor returns and a cushion for volatility.

“Fixed income investors were too exuberant about rate cuts earlier this year, but now that markets are not aggressively predicting cuts, fixed income yields are more attractive,” says Vince Gonzales, portfolio manager of the Short-Term Bond Fund of America® at Capital Group. In his view, bonds remain fundamental as economic growth slows and can provide a strong counterbalance to stock market volatility.

Additionally, Gonzales adds that “given the recent tightening of corporate bond spreads, we are seeing better opportunities in higher-quality sectors with attractive yields, such as securitized credit and agency mortgage-backed securities (MBS).” According to his view, mortgage bonds with higher coupons are especially attractive. “These bonds are unlikely to be refinanced before maturity, given current mortgage rates of around 7%,” he notes.

On the other hand, Jim Cielinski, Global Head of Fixed Income at Janus Henderson, acknowledges that the fixed income market is currently very different from a few years ago: “Yields are at levels that typically pay well above inflation and offer the prospect of capital gains if rates fall. Those seeking attractive yields can start here. We see solid prospects for both healthy income and some additional capital appreciation in the next six months.”

According to his stance, they prefer European markets to US ones, as they believe the relatively weaker European economy offers more visibility of a lower rate trajectory. “With an economic backdrop of resilient but moderate growth in the US, a revival of the European economy, and less pessimism about China’s economic outlook, there is a chance that credit spreads will narrow. Among corporate sectors, we continue to prefer companies with good interest coverage ratios and strong cash flow, and we see value opportunities in some areas that have been disadvantaged, such as real estate equities,” says Cielinski.

Additionally, the expert acknowledges that credit spreads as a whole are close to their historical levels, which he believes leaves little room if corporate prospects worsen. “With this in mind, we see value in diversification, especially towards securitized debt, such as mortgage-backed securities, asset-backed securities, and collateralized loan obligations. In this case, misconceptions about these asset classes, combined with the aftermath of rate volatility, have made spreads and yields offered appear attractive. Yields in the securitized sectors are more attractive in historical terms, and they are more likely not to be affected by a more severe slowdown,” he concludes.

Don’t Forget Equities

Wellington Management argues that their position is to continue overweighting equities. “The global economy is growing steadily, and the risk of recession has faded, with strong and continuous US economic growth and an increasing momentum of global growth. Although disinflationary pressures have stalled in recent months, especially in the US, we still believe that rates have peaked in this cycle and expect a relaxation of monetary policy in the next 12 months,” explains Wellington Management’s multi-asset strategy team.

Consequently, they add, this makes them prefer the US and Japan over Europe and emerging markets. “We consider the former as our main developed market due to the macroeconomic context and our confidence in the potential of AI to continue underpinning earnings growth. We have a moderately overweight view on Japan and remain skeptical of a material improvement in China, given the real estate and consumer confidence issues,” they add.

“Conditions appear favorable for US and Japanese equities to extend their good streak. The solid growth and healthy earnings of the former, coupled with the structural drivers and corporate reforms of the latter, partly justify the increased valuations in these regions, but not entirely; thus, especially in the US, we are going beyond the hottest areas of the market to uncover opportunities. Mid-cap stocks offer solid long-term growth potential at reasonable prices and should also withstand higher rates,” adds Henk-Jan Rikkerink, global head of Solutions and Multi-Assets at Fidelity International.

For its part, abrdn has also increased its conviction in developed market equities, which will benefit from interest rate cuts and solid corporate fundamentals. “The Japanese equity market remains particularly interesting, as its companies are increasingly focusing on shareholder profitability thanks to a cultural shift in buybacks and corporate governance in general. The Japanese market has exposure to a variety of companies well-positioned to benefit from demand for both artificial intelligence and the green transition. We also find European and British equities interesting, given the recovery in activity, valuations, and (at least in the case of the UK) the potential return to a more stable political environment,” says Peter Branner, Chief Investments Officer at abrdn.

On the other hand, Branner believes that Chinese equity valuations seem attractive but face the country’s real estate market problems. “The Indian market should benefit from strong growth and structural reforms, but Narendra Modi’s reduced government majority may limit the scope of the country’s reform agenda, and valuations already discount a lot of good news,” adds the CIO of abrdn.

Alternatives and Currencies

Finally, Branner acknowledges that they have improved their view of the alternatives segment after two years of underweighting. “Rate cuts, limited supply, and strong rental growth mean that the valuation adjustment is largely complete. Structural factors favor the residential sector, data centers, and logistics,” he highlights.

Fidelity International Updates Its Sustainable Investment Framework and Creates Three Major Categories

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Fidelity International has revised its sustainable investment framework to adapt to changes in this field, in line with client needs and environmental, social, and governance (ESG) regulations. As the management company reminds us, sustainability is an essential element of Fidelity’s active investment approach.

The company has a robust investment analysis methodology that incorporates sustainability into its fundamental analyses and integrates its proprietary sustainability ratings with insights generated by its equity, corporate debt, macroeconomic, and quantitative analysts to obtain a comprehensive view of the companies and markets it studies.

They explain that this framework has been designed to complement the company’s overall investment approach and provide clients with greater clarity and transparency. Within this revised framework, which will be applied starting from July 30, 2024, Fidelity has created three major categories: ESG Unconstrained, ESG Tilt, and ESG Target.

Regarding these categories, they explain that ESG Unconstrained comprises products that seek to achieve financial returns and may or may not integrate ESG risks and opportunities into the investment process. “The products in this category apply the exclusions that Fidelity has adopted for the entire company,” they clarify.

In the case of the ESG Tilt category, it comprises products that seek to generate financial returns and promote environmental and social characteristics by favoring issuers with better ESG performance than the benchmark index or the product’s investment universe. Additionally, products in this category adopt the exclusions from the ESG Unconstrained group and apply others, such as tobacco production, thermal coal mining, thermal coal power generation, and certain public sector issuer exclusions.

Thirdly, in the ESG Target category are “products that seek to generate financial returns and prioritize ESG or sustainability as a key investment objective, such as investing in ESG leaders (issuers with superior ESG ratings), sustainable investments, sustainable themes (such as climate change or transition), or complying with impact investment standards. Products in this category are subject to the reinforced exclusions mentioned earlier and may apply others.”

On the occasion of this announcement, Jenn-Hui Tan, Director of Sustainability at Fidelity International, stated: “We have long been committed to sustainable investing and have continued to evolve our approach and capabilities in line with client needs and ESG regulations. Integrating sustainability into investment analysis and portfolio construction is part of our core process of identifying the drivers of long-term value creation. The objective of our revised framework is to facilitate the creation and maintenance of a consistent, transparent, and practical range of investment capabilities that cover changes in client needs and regulation. We believe this framework appropriately combines a robust approach to sustainability with a flexible approach that can accommodate different investment styles, asset classes, and client preferences.”

New Trends in Private Markets

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The growth of private markets has so far been primarily driven by the demand from institutional investors such as sovereign wealth funds, insurers, or pension funds, among others. However, various experts from M&G Investments note the expansion of the topics of conversation around private markets, as well as a greater interest in different forms of access to them, such as through impact strategies. “There are three major changes in this market that are too significant to be ignored: the size of the opportunity set, the increase in the number of geographies, and the very definition of what private assets are, which has broadened,” says Ciaran Mulligan, CIO of Investment Management and Oversight and co-director of M&G Life’s Treasury and Investment office.

Opportunities by Segments

The global financial crisis marked a turning point for private markets from a credit origination perspective, transferring much of the prominence held by banks to more agile players in the market. Emmanuel Deblanc, CIO of Private Markets at M&G Investments, states that to operate in private markets, “size and having a good name are important, because they inspire confidence in banks, which has a multiplier effect in making banks feel comfortable with underwriting assets.”

The expert also notes that the investment ecosystem has evolved, exemplified by the presence of many infrastructure funds now having their own financing teams, enabling them to attract flows beyond banking. He also observes that the role of banks has evolved, now acting more as facilitators than in the past, advising on transactions without necessarily taking positions on their balance sheets.

Deblanc adds that the emergence of large structural investment themes is also affecting this investment universe, specifically citing the climate transition: “It will provide key growth for this asset class, allowing access to thematic investments in energy and social infrastructure.” “Investments in energy transition open up a significant investment charge by risk and volume; we are seeing much faster growth than expected five years ago, accelerated by the geopolitical events of recent years,” adds the expert.

Regarding private credit, Deblanc states that the investment universe has expanded and matured significantly, though it remains an “inefficient, very complex market where understanding the local context is necessary.” Ciaran Mulligan adds to these observations the increase in capabilities in Europe and, to a lesser extent, in emerging markets, where professional investors like M&G are beginning to consider the possibilities presented by this universe through leveraged loans, direct lending, and corporate debt. The expert clarifies that the investment horizon is crucial for investing in this asset class, with a recommended duration of 15 to 25 years. With this in mind, operations “will take into account that debt levels will increase in the future.” Specifically for M&G, the private credit investment strategy focuses on companies with revenues between 40 and 100 million euros, considering it a segment with less activity.

Structured credit is the last segment Deblanc cites, particularly in the ABS segment. The expert recalls that this is a market with “fewer players because it is a complex asset in a closed market,” but in return, it offers the possibility of a differential with additional points of profitability. The expert observes that capital requirements have increased, a trend accelerated by the collapse of Silicon Valley Bank, opening new opportunities for investors in “a very sophisticated market segment.”

M&G Investments manages 84 billion euros in private assets, with the largest segment being real estate, with over 39 billion.

A Transition Phase

Deblanc does not see systemic risk in private markets and considers the current environment, where global GDP will move between 2% and 3% and there is no excess demand, to be benign for this investment universe. That said, he notes that the market is undergoing a transition phase, as the large gap that used to exist between buyers and sellers is narrowing. This is a trend he believes will accelerate from the fourth quarter of 2024, leading to increased dispersion among managers: “Good managers will become more visible,” he concluded.

Neal Brooks, Global Head of Product and Distribution at M&G Investments, admits that the growth of the private assets market has slowed in recent months due to the ‘higher for longer’ environment, but he expects demand to remain to the point that he anticipates the total investment universe to reach 13 trillion dollars by 2028, primarily in three areas: infrastructure, private equity, and private debt. Brooks speaks of growing appetite from clients, but also from governments and regulators, which he believes will open up markets by allowing access to a larger number of companies. This growth, according to the expert, will occur at the expense of other vehicles traditionally used to gain exposure to these markets, such as hedge funds.

Finally, Brooks highlighted the importance of the current moment in terms of developing product strategies that are accessible to a wide range of investors, noting that currently, 80% of companies with over 100 billion in revenue are not publicly traded. This is compounded by the increasing trend of public companies being delisted to become private again. M&G is advancing in developing new structures to facilitate this access, for example, through the launch of ELTIFs. “Financial education is very important; clients themselves are aware that they need it to help them allocate their capital correctly,” Brooks concluded.

Santander AM to Appoint Pablo Costella as New Head of Fixed Income in Latin America

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Santander AM, the asset management division of Banco Santander, is set to appoint Pablo Costella as the new Head of Fixed Income for Latin America as part of a broader plan to modernize operations in the region through centralization, according to information published by Bloomberg.

Costella, who previously served as the Director of Global Fixed Income at BICE Inversiones Asset Management, will replace Alfredo Mordezki, who is based in London and will leave the Spanish entity after 14 years, according to sources within the company consulted by Bloomberg.

Costella’s appointment, based in Chile, is part of a broader reorganization by Banco Santander, aiming to relocate asset management positions for Latin America within the region rather than placing them in other parts of the world. Last year, Santander AM appointed Héctor Godoy to lead the Latin American Equity division, also from Chile.

Santander AM, led by Samantha Ricciardi since February 2022, has focused on attracting new institutional clients and aims to grow in alternative investments with private debt and infrastructure funds. Santander AM manages 226 billion euros in assets under management.

The investment fund business is part of the wealth management and insurance division, headed by Javier García-Carranza, who replaced Víctor Matarranz in May.

Allfunds Appoints Paola Rengifo as Head of Global Operations and Miguel Ángel Treceño as Chief Data Officer

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Allfunds strengthens its team with two new hires to continue optimizing performance and efficiency in its global operations. According to the WealthTech B2B platform for the fund industry, Paola Rengifo joins Allfunds as Global Head of Operations and Miguel Ángel Treceño as Chief Data Officer (CDO). Both will be based in Madrid and will report to Antonio Valera, COO of Allfunds.

“The appointment of Paola and Miguel Ángel further demonstrates our commitment to attracting leading talent that fosters internal collaboration and seeks synergies that benefit our clients. Allfunds aims to continue leading the transformation in the wealth management industry; with the support of our advanced technology and growing team, we are confident in our ability to remain a key partner for our clients, exceeding their expectations in a constantly evolving environment,” highlighted Antonio Valera, Chief Operating Officer of Allfunds.

As the new Global Head of Operations, Paola Rengifo will be tasked with optimizing the global operational structure through innovation, automation, and the pursuit of synergies, in close collaboration with the technology area. Rengifo has 32 years of experience in the financial sector with JP Morgan Chase & Co., with international responsibility. Throughout her career, she has specialized in the analysis and implementation of corporate strategies with a particular focus on platforms, products, and resources. She has been a member of the Technology and Innovation Advisory Board of the Santalucía Group and is currently a member of the Council for Innovation and Good Governance (CIBG) in Spain.

Miguel Ángel Treceño joins the team as Chief Data Officer (CDO). In this newly created role, he will focus on digital transformation and maximizing the use and value of data at Allfunds. Treceño has over 20 years of experience in financial services and wealth management, having worked at Credit Suisse, Santander, JP Morgan Chase & Co., and Citibank. At Citi, he led a global team responsible for the data strategy, architecture, and investment program for its Wealth Management Banking, Lending, and Custody platform from New York.

The New Popular Front Surprises in the French Legislative Elections: The Deficit Remains a Focus for the Markets

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The left-wing coalition, New Popular Front, unexpectedly won the second round of the French legislative elections, and instead of clearing up the market uncertainties triggered by President Emmanuel Macron’s call for elections, it has refocused investors’ concerns on France’s fiscal deficit and its impact on financial markets.

Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, sees three potential outcomes. Firstly, a technocratic government, composed of technical experts rather than politicians. However, he considers this scenario unlikely. The second scenario points to a government formed by moderate parties (Socialist Party and Together for the Republic, the coalition of President Emmanuel Macron’s allied parties). This option also seems to have limited prospects. Haefele notes that under Article 12 of the French Constitution, the President of the Republic can only dissolve the Assembly again within a 12-month period.

A third option could be Macron appointing a prime minister from the party with the most seats in the National Assembly, which, after Sunday’s elections, is the New Popular Front (NFP). While it is customary for the president to appoint a prime minister from the majority party, there is no legal obligation to do so. A confirmation vote in parliament is not required, but in practice, the prime minister needs the support of the majority due to the parliament’s power to overthrow the government with a vote of no confidence.

This option, however, will have economic consequences. In Haefele’s opinion, “an NFP government would likely attempt to roll back recent pension and unemployment reforms, increase the minimum wage, and not pursue fiscal consolidation. We believe that the NFP’s program, if implemented as proposed, could lead to a significant deterioration of the already high budget deficit.”

The election results will undoubtedly impact the markets. Haefele assures that “an indecisive parliament is probably the best scenario for European equities,” and given that European stock indices barely changed in early trading, “it suggests that the outcome was not surprising.”

However, he considers this the best result of the second round, adding, “volatility may remain high”: political uncertainty remains elevated in France, and the elections have heightened focus on France’s precarious debt situation, with high levels of public debt and budget deficits, according to the expert. Therefore, he expects a certain political risk premium to persist compared to a month ago, and that the market rally will be limited to the very short term, “as foreign investors are likely to continue viewing Europe’s political backdrop as uncertain.”

In fixed income, UBS clarifies that due to possible political paralysis, limited visibility on political/regulatory decisions, and the potential for new negative ratings actions on French sovereign debt, “volatility in French assets will remain high.” Therefore, with limited upside potential in French bonds, the firm sees better opportunities in countries with more stable debt trajectories.

In currencies, Haefele notes that the impact on the euro is likely to be limited but also sees nuances. If the left forms a government and implements its strategy, “the euro/dollar exchange rate is likely to fall below 1.05, given the expansive fiscal implications of the party’s manifesto at a time when France is likely to face an Excessive Deficit Procedure.” If a government composed of moderate parties is formed, the euro should remain close to 1.08, in his opinion.

According to Alex Everett, Investment Manager at abrdn, the election result “has brought some relief in France” in the eyes of the markets, as Marine Le Pen’s National Rally “convincingly lost its coveted absolute majority,” but he notes that the surprising result of the left-wing coalition “leaves a complicated power struggle” in the country. “Now that a parliament without a majority seems very likely, markets can take comfort in this ‘less bad’ outcome. All things being equal, a significant increase in French debt is not expected. Compromise politics implies few changes from now on, smoothing the excesses of any party,” says Everett.

However, the expert acknowledges that “once the dust settles, the stalemate of a divided parliament will prove more damaging than initially thought.” At this point, he points to France’s budgetary problems, which have not disappeared: “The September 20 deadline to present a credible deficit reduction plan is approaching. Macron’s attempt to force unity has further fueled discord. We are skeptical about achieving significant budgetary progress and continue to underweight France compared to its European counterparts,” he asserts.

Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS Investment Management, is clear about the French legislative election results: “Divided politics, less political visibility, and more mid-term uncertainties.” In the short term, “a ‘rainbow coalition’ or a ‘caretaker government’ are feasible. Certainly, it’s not the most politically acceptable outcome, but it’s also not the least favorable for the market,” he asserts, maintaining his short-term range of 70-90 basis points for the spreads between French and German bonds. Behind these market doubts are “relations with the EU, which may be far from benign, especially in an EDP context,” and he advises selling on the upticks in spreads.

For his part, Kaspar Koechli, Economist at Julius Baer, also observes that the absence of an absolute majority from the far right or far left in the National Assembly “keeps fears about the implementation of spending-driven fiscal policy changes limited and practically unchanged since the first round.” However, he is aware that the fixed income market may remain somewhat uneasy about a potential left-wing government, “which might lean more towards spending and question fiscal consolidation efforts in its next budget project for 2025, necessary for the resumption of the EU Stability and Growth Pact.”

With ongoing political uncertainty and an unclear timeline for forming a new government, “we are likely to see a breakdown of the recent tightening of spreads that occurred after the first round last Sunday, following the shock of the announcement of early elections that caused a spread rally,” according to Koechli. Moreover, he notes that while the euro has remained range-bound, “it is awaiting more clarity and is likely vulnerable to news from the French fiscal front.”

“In the long term, the events of recent weeks are problematic from an EU perspective. A strong EU needs a strong France almost as much as a strong Germany. With an increasingly unclear political situation in both countries, the EU project will need a new push. As a desk, the general opinion was to reduce exposure to French assets when President Macron announced his early elections, reflecting increased uncertainty. With the French elections nearing their end, the consensus is more inclined towards identifying investment opportunities. However, our bias towards globally relevant companies rather than those more focused on the domestic sphere will remain a feature of our thinking,” adds Jamie Ross, Portfolio Manager at Janus Henderson.

For now, the market reaction has been mixed, given the prevailing uncertainty. “The 10-year OAT-Bund spread is slightly narrower at 65 basis points. French and European equities opened the week positive (around +0.5% late morning); and the euro opened slightly lower but has already recovered those losses (EUR/USD at 1.0840),” highlights Vincent Chaigneau, Head of Research at Generali AM, part of the Generali Investments ecosystem.