On Monday, following Sunday’s first-round of presidential elections in France, the CAC 40 index (which is largely representative of the French equity markets) fell nearly 3%. The presidential incumbent, Nicolas Sarkozy, who has been on board with Germany’s austerity plans to tackle the European financial crisis, came in second place in the first-round vote to Francois Hollande. Mr. Hollande, who has run on a platform against spending cuts, is gaining traction among voters for a proposed increase in the top income tax rate to 70% and a continuation of government spending to fill the void that the European recession has left in France’s GDP. Since no candidate received more than 50% of the popular vote in the first-round, the eventual winner will be decided in a runoff on May 6th.
Without accurate foresight, the European markets were caught off guard on Monday, and not pleasantly so. Could this be a reasonable case study depicting the connection between higher tax rates, economic growth and investment returns? French voters have the right to elect the presidential candidate that they see most fit for the job once every five years. In the same vein, investors, have the right to vote with their capital, although on a much more frequent basis. Part of the beauty of modern capital markets is the mobility of capital. If capital feels at risk, it will find a new home. One could reasonably venture to say that investment capital winced at the thought of a Hollande presidency.
While the European equity markets are influenced by countless factors on any one day, the connection between the French people voting on Sunday and investors voting with their dollars on Monday seems to be more than happenstance.
As always, comments and competing viewpoints are encouraged.