French Elections, Paul the Octopus still ahead
The UK elections unfolded largely as expected, with Labour securing a landslide victory. However, Reform UK outperformed recent polls, gaining more seats than anticipated. This success for Nigel Farage's party underscores the growing polarisation in UK politics, as voters move left and right at the expense of the Conservatives.
Focus now turns to Sunday's French elections, where the far-right National Party has gained significant momentum. While Le Pen's party seems poised for an overall majority, opposition parties are employing strategic candidate withdrawals to prevent splitting the anti-right vote.
While both the UK and France grapple with political shifts, their economic situations also warrant comparison, particularly their debt-to-GDP ratios and Net Foreign Asset (NFA) positions. Among G7 nations, only Germany projects a debt-to-GDP ratio below 100% this year, at 64%. The UK and France forecast ratios of 104% and 111% respectively, indicating a heavier debt burden. However, a more comprehensive measure of a country's creditworthiness is its NFA, which is the difference between a nation's foreign assets (what it owns abroad) and its foreign liabilities (what it owes to foreigners).
Despite similar debt-to-GDP ratios, the UK and France differ significantly in their NFA positions. The UK's NFA has remained relatively stable over the past five decades, maintaining a 4-star rating, while France's NFA peaked at 9% of GDP in 1997 but has since declined to just under -50% of GDP, barely retaining a 3-star rating. This highlights the importance of considering multiple factors when assessing a country's economic health.
The economic landscape is not the only area where these two countries are being compared. Our Fixed Income team has been applying the NFA model to predict Euro 2024 outcomes, with mixed results. While initially successful in forecasting the first four matches of the round of 16, including England's victory over Slovakia, our predictions have since faltered, achieving a 63% success rate in that round. This performance pales in comparison to the legendary Paul the Octopus, who achieved 85.7% accuracy during the 2008 Euros and 2010 World Cup. Paul's keepers at Germany's Sea Life Centre used his food choices to predict match results, a method far removed from our financial modelling, but with superior results!
Looking ahead, our NFA model suggests that if England faces France in the final, England should emerge victorious. However, England (4 stars) must first overcome 6-star rated Switzerland. While we typically hope for accurate model predictions, in this case, we're rooting for an upset!
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