Managers: Le Pen win would hit markets as hard as Brexit, Trump

All the polls show French President Emmanuel Macron is likely to win a second term on April 24. But from Citigroup to asset manager Amundi, the warnings are piling up that markets are underestimating the risk of a surprise.

If nationalist Marine Le Pen upsets the incumbent, European stocks are likely to slump on April 25, while French bonds would underperform German securities and the euro could even trade at parity with the dollar in coming months, according to investors and strategists. The full consequences wouldn't be visible until after legislative elections in June, they said, when it would be clear whether she has a majority to back her proposals to review free trade agreements and re-establish border controls.

Mr. Macron leads Ms. Le Pen by 55.7% to 44.3% heading into the sole debate this evening, a polling average shows. But memories are raw from 2016, when investors were blindsided by the strength of populist sentiment in the U.K.'s vote to leave the European Union and the U.S. election of Donald Trump.

Banks and fund managers are recommending a variety of strategies to hedge against a possible Ms. Le Pen win. Citigroup, which puts Mr. Macron's chance of winning at 65%, recommended Tuesday that investors sell eight-year French government bonds while buying the equivalent Austrian security. Amundi is "cautious" on European equities and the euro, favoring shares of high-quality U.S. companies and inexpensive stocks instead, the firm said last week.

Stephane Monier, chief investment officer at asset manager Lombard Odier, advises investors worried about a Ms. Le Pen win to cut their euro holdings in favor of the dollar.

The U.K.'s FTSE 100 Index slumped 5.6% over two days after the June 23, 2016, Brexit referendum, while the Stoxx 600 lost 11%.

A Ms. Le Pen victory arguably would be an even bigger shock to investors, since the polls show a larger lead for Mr. Macron than they did for the U.K.'s remain vote in 2016. And French pollsters have a good track record, with surveys ahead of the 2017 election and in this year's first round of balloting very much in line with the outcomes.

There would be "a Black Monday" in the stock market if Ms. Le Pen wins, with the Stoxx 600 probably down 6% and France's CAC 40 Index sinking more than that, said Ludovic Labal, manager of the Strategic Europe Quality Fund at Eric Sturdza Investments.

Oddo BHF strategist Sylvain Goyon put the probability of a Le Pen win at no greater than what it was five years ago, but such an event would be particularly unfavorable to financial stocks, while the euro would likely move below parity against the dollar.

On the credit side, Barclays strategists warned that corporate bond investors shouldn't get too blase about the possibility of Ms. Le Pen becoming the next president, saying that risks are skewed to the downside.

"It would only take one poll indicating a tighter race to trigger an underperformance of French credits," the Barclays analysts wrote. "Given the lack of any risk premium in these credits, we remain wary."

A win for Ms. Le Pen could see the spread between Italian and German 10-year bond yields widen to close to 250 basis points, from 164 basis points at Tuesday's close, said Frederik Ducrozet, a strategist at Pictet Wealth Management. Longer term there is also a "lot of complacency" about the level at which the European Central Bank would step in to calm markets, Mr. Ducrozet added.

For now, though, as Mr. Macron's lead in the polls has grown, the spread between the yields on 10-year French government bonds and equivalent German securities has narrowed to 47 basis points from 55 basis points before the first round April 10. Vincent Juvyns, global market strategist at J.P. Morgan Asset Management, said that difference could rise to more than 80 basis points in the event of a Ms. Le Pen win.