A subscriber wrote me to note that my recent piece arguing that it is a good time for U.S. investors to diversify in eurozone stocks ignored the danger posed by the possibility that Marine Le Pen will be elected as president in France.
This is a very complex issue. As the Brexit referendum vote in the U.K. and the victory of Donald Trump in the U.S. have shown, the electorate seems determined to confound predictions and behave in surprising ways. Until recently, a victory by Le Pen, head of the Front National, was considered impossible. But lately, more and more people believe it is possible. Yet this outcome still could prove to be an investment opportunity.
Right now, opinion polls show she is almost sure to be successful in the first round of the French presidential election, which takes place April 23. If no candidate wins a majority of the votes, a runoff between the two top candidates is set for May 7.
Yesterday, Le Pen unveiled the economic plan she would put in place if she wins the presidency; it basically amounts to defaulting on the country's sovereign debt. Her plan aims to "support French companies faced with unfair international competition by putting in place intelligent protectionism and re-establishing a national currency adapted to our economy, to underpin our competitiveness."
Her adviser, Bernard Monot, is quoted by Bloomberg as saying this platform in effect would mean the creation of a new French franc. Le Pen's party has said in the past that the national debt would be re-denominated in the new currency.
Major rating agency S&P said such an action would amount to default. LePen doesn't seem to care, though. Her plan is to disregard the international financial markets. Number 43 on the list of her 144 presidential promises is "ending the dependence on financial markets by authorizing again the direct financing of the Treasury by the national bank of France."
In other words, the central bank will print the money the government will spend on social programs, investment and so forth -- just like Zimbabwe's central bank did. We know how that ended. International bondholders definitely are becoming more restless about Le Pen's plans: The spread between 10-year bond yields in France and Germany has widened to 78 basis points from 48 at the beginning of the year.
The main thing for investors is to gauge how real Le Pen's chances are to become president. One factor to consider: Republican Francois Fillon, the front-runner alternative candidate, has been accused of improper use of public money for paying his wife to help him, which prompted speculation that he might need to step down.
But on Monday Fillon came out swinging, saying his wife indeed worked for him at a time when it was the acceptable thing to do, but that the times had moved on and he understood the public's concern. He also made a detailed presentation of his family's financial affairs, saying he had nothing to hide from the French people.
Whether that explanation is enough will be up to the French voters. Still, even if Fillon does not manage to recoup his lost popularity, Le Pen's main enemy is herself. While her anti-immigration stance might appeal to many unhappy voters, her intentions to scrap the euro could hold her back.
Withdrawing from the eurozone would ruin the French, and they know it. Their debt would grow as it would be denominated into an appreciating currency, while hyperinflation would eat into their savings and purchasing power would collapse. The euro's popularity still seems to be strong in France, with 68% of respondents in an opinion poll last December supporting the single currency.
On Tuesday morning, the euro was trading 0.7% lower vs. the U.S. dollar after German industrial production showed an unexpected decline of 3%, the worst since 2009 at the height of the financial crisis. For investors with a taste for risk, a weaker euro offers opportunities to buy some eurozone stocks while they are cheap, and especially some French stocks in case the worst scenario does not materialize.
Perhaps looking for French stocks with domestic exposure, rather than international ones, would be wise at this stage. After all, even if protectionist Le Pen wins, the French still will need to feed, clothe and warm themselves.