What Could Happen If Le Pen Wins? ETFs In Focus

A recent poll conducted among 995 voters on April 5, 2017 indicated that there could be a tie between Emmanuel Macron and Marine Le Pen in the first run off to the French presidential election on April 23, 2017. They are expected to get 23.5% of votes each.

In the past two weeks, Macron has slipped 2% and Le Pen 0.5%, with Francois Fillon having his best month, with 19% support predicted. Though the decline in support for Macron is concerning, the Elabe poll predicts that Le Pen is likely to lag Macron in the second run off.

A potential Le Pen victory is a concern for investors, given her promise to hold a Frexit referendum. Citigroup Inc (NYSE:C). stated that French banks could lose up to 25% in market cap in case Le Pen wins.

Even though the polls say that Macron will beat Le Pen 63-37 in the second run-off if they face each other on May 7, we know from history that these polls cannot be blindly trusted. Therefore, it will be unwise to not price in the probability of a Le Pen victory as well. Analysts predict that her victory could shake up European equities and currency (read: Outlook for French ETFs Ahead of First Presidential Debate).

French bond yields are likely to rise sharply to price in the risks of devaluation, as Le Pen promises to take euro out and bring in franc. This could lead to major troubles for the French economy in the short term as investors do not like destabilization (read: Merkel's Party Wins State Election: German ETF in Focus).

There is however some positive news for investors. The preliminary Purchasing Managers Index (PMI) reached 56.7 in March, the highest since April 2011, and up from February’s 55.5. Moreover, the Economic Sentiment Indicator posted a score of 107.9 in the Eurozone and 109.1 in the European Union, way above its 26-year long-term average of 100.

Therefore, after weighing all the odds, we believe that despite the risks, the current scenario presents a strong case for investing in the Euro region (see all European Equity ETFs here).

WisdomTree Europe Hedged Equity Fund HEDJ

This fund is appropriate for investors looking to gain diversified exposure to European equities without betting on the euro.

HEDJ has AUM of $9.27 billion and charges 58 basis points in fees per year. Industrials, Consumer Discretionary, and Consumer Staples comprise more than 52% of the fund holdings. The fund has a 25.64% allocation to Germany, 24.43% to France, and 19.05% to Spain (as of April 4, 2017). It returned 8.62% in the year-to-date time frame and 24.43% in the past one year (as of April 5, 2017).

iShares Currency Hedged MSCI Eurozone ETF HEZU

This ETF is a play on exporters and local European companies and is an appropriate bet for investors looking for exposure to this region.

The fund manages AUM of $1.34 billion and charges 51 bps in fees per year. The top three sector holdings of this fund are Financials, Industrials, and Consumer Discretionary with 19.38%, 14.95%, and 13.69% allocation, respectively. It has a 31.9% allocation to France, 29.53% to Germany, and 10.81% to the Netherlands (as of April 4, 2017). This fund returned 6.88% in the year-to-date time frame and 21.6% in the past one year (as of April 5, 2017).

SPDR EURO STOXX 50 Currency Hedged (NYSE:HFEZ) ETF HFEZ

This ETF is a play on European companies and seeks to replicate the EURO STOXX 50 Hedged USD Index.

The fund manages AUM of $23.04 million and charges 32 bps in fees per year. The top three sector holdings of this fund are Financials, Industrials, and Consumer Discretionary with 21.79%, 14.44%, and 11.21% allocation, respectively. It has a 35.62% allocation to France, 33.87% to Germany, and 10.64% to Spain (as of April 4, 2017). This fund returned 6.80% in the year-to-date time frame and 23.7% in the past one year (as of April 5, 2017) (read: Europe ETF (FEZ) Hits New 52-Week High).

To Conclude

With better-than-expected economic results in the region and extremely low chances of a Le Pen victory, we believe the environment is prudent for investing in the Euro region, without exposure to the single currency.

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