Mark Haefele, chief investment officer at UBS Global Wealth Management, together with EFG AM and Edmond de Rothschild AM, discuss the investment implications of the French elections, after France’s President Emmanuel Macron called for snap elections due to a poor showing for his party in the recent European elections.

The possibility that Marine Le Pen’s far-right Rassemblement National (RN) party could win the election on a platform of unfunded public spending has unsettled financial markets, causing French equities and debt to decline last week, according to Mark Haefele at UBS Global Wealth Management.

The outcome of the elections is uncertain due to the electoral system's two-round voting process, making it difficult to predict outcomes. The first round on 30 June is likely to see 10 to 15 candidates per constituency, with only those securing over 12.5 per cent of votes advancing to the second round on 7 July.

Based on the latest polls, Haefele believes that the probability of no clear majority emerging is high, leading to potential political instability. A first opinion poll, conducted by Harris interactive, suggests that RN could secure 235 to 265 seats (a significant increase from their current 89 seats). President Macron’s camp (Ensemble) could win 125 to 155 seats (a decrease from their current 249 seats). The majority in the National Assembly is 289 seats.

Regardless of which scenario comes to pass, Haefele thinks that France's fiscal situation will remain challenging under EU fiscal rules, putting serious constraints on any government's fiscal headroom. Before the announcement of the snap elections, France's finances were in a very precarious situation, with the largest primary public deficit of the Eurozone in 2023.

Equities
“Policy uncertainty is negative for equities, with higher bond yields and political risk premiums weighing on the market,” Haefele continued. Within French equities, he believes that financials, utilities, and infrastructure stocks are most vulnerable to policy changes. "There are also implications for the wider European market given that one of the positive cases for European equities was linked to potential inflows from foreign investors, who may now be deterred by political uncertainty," he said. Benjamin Melman, global chief investment officer at Paris-based Edmond de Rothschild Asset Management, has also lowered risks within his asset allocation, first on European equities, following the announcement of the snap election, and later on US equities to take some profits and revert to a neutral exposure to risk-assets. 

Haefele recommends that investors use structured strategies to manage risks and explore opportunities in undervalued regions such as the UK. Other wealth managers – Alec Cutler at Orbis Investment Management for example – also favour undervalued UK equities in 2024. See more commentary here.  

Sovereign debt
Hafaele believes that political news should continue to affect French government bond yields, especially in medium to longer tenures. Short-dated bonds are unlikely to be much affected by politics and are likely to rather reflect the outlook for the ECB’s interest rate path. France’s credit outlook is deteriorating. Before recent events, he was expecting rating cuts of one notch over the next 12 to 24 months. Higher deficits than currently anticipated could lead to earlier and to more cuts.

In the absence of (unexpected) political chaos, he thinks that risk premiums for French bonds in the run-up to the elections should remain in a fairly contained range of around 20 to 30 basis points around the current level of 68 bps over 10-year German Bunds. The sharp sell-off has triggered some market chatter of possible European Central Bank (ECB) intervention. With the potential for further spread widening into the first round of the elections, Haefele prefers select French corporate bonds rather than government bonds.

Corporate bonds
“French corporate bonds are less volatile than government bonds and are not expected to be significantly impacted by the elections,” he continued. Haefele prefers quality bonds, expecting yields to fall as markets price in a central bank rate-cutting cycle. He sees value for investors in select investment grade bonds from multinational companies that are less exposed to national politics and offer attractive yields.

More widespread weakness in the euro would require a “Frexit” narrative to develop. But he does not think that the relationship with the European Union and other partners will dramatically change after the election. “President Macron would retain constitutional power over Europe, foreign policy, and defence. The RN no longer wants to leave the EU and the eurozone, instead it proposes limiting the free movement of migrants by carrying out national border controls and dialling back EU climate rules,” Haefele said.

“Overall, the French elections present a complex landscape with significant implications for various asset classes. Investors should avoid overreacting to polls,” he added. In addition, Haefele thinks that political biases can be counterproductive for investment portfolios and that investors should focus on the long term.

Nevertheless, senior economist GianLuigi Mandruzzato at EFG Asset Management believes the upcoming elections in France risk having lasting consequences for the future of the European Union and for European financial assets. “It seems unlikely that market sentiment will improve much until the attitude of the new government on the most sensitive issues for the markets becomes clearer. An extended period of volatility in European assets prices cannot be ruled out, also considering the advance of eurosceptic parties in the main countries of the European Union,” Mandruzzato said in a note.