Position in Europe: Long German Bunds (BUNL)
Moments ago Keith covered France (EWQ) in the Hedgeye Virtual Portfolio. We’re taking this price opportunity to cover for a TRADE; our intermediate term negative view on France hasn’t changed. Below we provide our quantitative levels on for EWQ:
This Sunday marks the first of two French presidential election votes. While the leading two candidates, the incumbent Nicolas Sarkozy and Socialist Francois Hollande, will advance to the second round vote on May 6th, recent polls suggest Hollande will beat Sarkozy 29% to 24% in Round 1 and 58% to 42% in Round 2, according to CSA.
What’s broadly clear is that both candidates plan to increase taxes and impose fees on financial transactions. Both have declared to reduce the country’s deficit to 0% (as a % of GDP), Hollande by 2017 and Sarkozy by 2016. Both guide to reduce the deficit to 3% by 2013 versus 5.3% in 2011.
However, Hollande has signaled an even more socialist agenda, which we think should result in the inability of the state to meet its deficit and debt reduction targets. Hollande wants to increase spending by €20 MM over five years (by repealing €29 MM of tax breaks and generating revenue by separating retail and investment bank operations and raising the income tax on earners over €1 MM to 75%) and reduce the retirement age to 60 from 62. With the country’s debt rising to the 90% level, we expect growth to be compressed, as proven by the work of Reinhart and Rogoff. Finally, Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries.
Taken together, we think these policy moves will disadvantage the broader economy versus its European peers.