Wealth Strategies

Wealth Managers React To French Election Results

Amanda Cheesley Deputy Editor 9 July 2024

Wealth Managers React To French Election Results

After the second round of the French elections ended on Sunday without any party gaining an absolute majority in the National Assembly, wealth managers discuss the impact on investment.

The large number of candidates dropping out from the second-round race and the highest voter turnout in four decades helped prevent Marine Le Pen's far-right Rassemblement National (RN) party from gaining a majority.

With no party gaining an absolute majority, the outcome of the French election raises the prospect of political deadlock. The president, Emmanuel Macron, is now expected to appoint a prime minister who is able to form a government. There isn’t a timetable for forming a government, but no legislation or regulations can be passed until one is formed. 

Here are some reactions from wealth managers to the vote.

Mark Haefele, chief investment officer, UBS Global Wealth Management
“A hung parliament is likely to be the best scenario for European equities. European stock indexes are little changed in early Asian trade, suggesting no surprise in the result. We view this as the best-case outcome from the second round, but volatility may remain high. French stocks (MSCI France) are down around 4 per cent since the election was announced on 9 June, and euro-area (MSCI EMU) stocks are down around 1.5 per cent over the same period. Political uncertainty remains elevated in France, and the election has heightened focus on France’s precarious debt situation with government debt levels and the fiscal deficit both elevated. We therefore expect some political risk premium to remain priced in, compared with a month ago, and expect the market rebound to be limited to the very near term, with foreign investors still likely to view Europe’s political backdrop as uncertain.

“In fixed income, French government bonds do not appear appealing. The fundamental outlook for French sovereign credit is deteriorating, in our view, with a high and rising debt ratio, elevated fiscal deficits, and an increasing cost of funding. In our view, credit rating agencies are unlikely to act in response to the election results; instead, they will likely wait for effective legislative changes in fiscal policy. A key event to watch will be how the new French government will address demands from the European Commission with respect to its excessive fiscal deficit. Considering the political timeline, more clarity will likely only emerge on this front around November.

“One of the key focus points of any new government will be the passing of a 2025 draft budget. A minority government can still pass a budget by bypassing the lower house. This can be achieved either by using Article 49.3 of the constitution, or using Article 47, which would turn the budget proposal into a formal law after 70 days or provide the government with means to spend and collect taxes.”

Zehrid Osmani, head of the global long-term unconstrained team at Martin Currie
“The market might initially worry that a win by the far left, which also has fiscal expansion plans, and policy initiatives that would increase wage costs for corporates, would be negative for the French economy. We would, however, highlight that the far-left party did not achieve an absolute majority, and therefore does not have control of parliament. As a result, it will find it hard to find backing for policies that are overly aggressive. We are therefore in our view unlikely to see France deviate in any major way from any current policies, or get into unorthodox fiscal expansion. Instead, we believe that France will continue to adhere to the fiscal programme of deficit reduction governed by the EU.

“As a result, our conclusion remains that the sell-off in French equities ahead of the elections could be overdone, especially given that a large proportion of the French index generates revenues and profits from outside France (we estimate >80 per cent). We would expect French spreads to gradually narrow again, as the market understands the situation more clearly, and as a prime minister gets nominated (which could take some weeks, until agreement between parties gets reached).

“In any case, the spectre of the French presidential elections in 2027 looms nearer and shouts louder, and represents the key risk that investors should focus on, should the French centrist coalition not have a charismatic leader to take over from President Macron who will be coming to the end of his second and final term as president.”  

Stephen Dover, head of Franklin Templeton Institute
“In France, the president (Emmanuel Macron) has power to make most foreign policy and national security policy decisions. The parliament, on the other hand, is responsible for most domestic policy decisions, including those affecting fiscal and other economic policies. Our sense is that markets will greet the outcome of the election as positive for European risk assets, bond spreads, and the euro. The alternative outcome of a parliament hostile to the president would have delivered considerably greater medium-term uncertainty than what is now likely. With modest exceptions, today's [yesterday's] outcome is likely to produce broad continuity in French domestic and foreign policy, as well as in France's approach to EU policies.

That said, whatever bounce markets enjoy is likely to be contained. France still faces considerable medium-term challenges including fiscal consolidation, long-term sustainability of key pillars of the social contract (pensions, healthcare) and pressing needs to increase productivity. It is highly unlikely that a majority constructed out of necessity (to keep the far right out of power) will have the political capital to address France's long-term challenges.”

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
“The new government will be fiscally constrained. With a public deficit of around 5 per cent of GDP, France recently received an official warning from the European Commission for exceeding the European Union deficit limit of 3 per cent of GDP (the so-called excessive deficit procedure). In addition, a political stalemate, de facto, limits the risk of a fiscal slippage as it will be difficult to pass significant spending plans, which could have caused some stress on France’s sovereign market and financial system. But the road to fiscal consolidation wanted by the EC may be bumpy and delayed under a hung parliament. 

“From an economic perspective, after years of pro-growth policies implemented by Macron’s government, the result of the elections marks a change, possibly focusing more on distributive aspects. But we think the near-term direction of the French economy will likely remain steady as not much gets done (one way or the other). Alongside its European peers, France is on a gradual path to recovery, led by activity in services. We expect this to continue. The European Central Bank started to cut interest rates in June and is likely to follow through in September and December this year. In turn, rates cuts are likely to be a renewed tailwind to credit and investment, as well as consumption, boosting overall growth.  

“Political volatility in France could stay elevated over the coming months. However, we think that it’s unlikely to have a significant market impact. The stalemate limits the risks of fiscal slippage and market-unfriendly policies. The economic outlook for Europe and France is also gradually improving (growth is recovering, inflation is getting closer to the European Central Bank’s 2 per cent target, and interest rates are falling). French stocks have already fallen, French-German government bond spreads have already widened, and the euro has fallen too. This means that markets have already adjusted to this hung-parliament scenario. Despite some political noise, and the occasional bout of market volatility, we think markets will now be driven by the improving fundamental picture of the European economy.”  

Alex Everett, investment manager at abrdn
“With a hung parliament now looking extremely likely, markets can take some solace in this least bad outcome. All else equal, no material jump higher in French borrowing is expected. Compromise politics means little change from here, watering down the excesses of any one party. Once the dust has settled, the deadlock of a hung parliament will prove more damaging than first implied. France’s budget problems have not disappeared. The 20 September deadline for a credible deficit reduction plan looms ever closer. Macron’s attempt to force unity has instead fuelled yet more discord. We are sceptical that meaningful budgetary progress can be made, and remain underweight France versus European peers.”

Richard Carter, head of fixed interest research at Quilter Cheviot
“While the election outcome may be viewed as a good result in the sense that it avoided a more disruptive scenario, it falls short of being a good outcome due to the ensuing uncertainty and the formidable fiscal challenges that lie ahead for France. Investors will need to remain vigilant as France navigates through this period of political and economic uncertainty.”

Michael Field, European market strategist at Morningstar
“Despite initial falls in French stocks when the election was first announced by President Macron, share prices have broadly recovered over the last few weeks. This fresh news may give French stocks a further boost. The election of a left-wing alliance would usually not be something for markets to celebrate but given the inherent fears investors had around a right-wing government, this announcement will very likely be a welcome one.

“The New Popular Front’s manifesto outlines its wish to increase minimum wage materially, as well as freeze energy and basic food prices. The manifesto proposes all of these measures be funded by the re-introduction of a wealth tax and an increase in income tax for high earners. As such, concerns for sectors such as utilities that existed over recent weeks when RN was leading in the polls may still be an ongoing concern for investors under this new party. However, the ability of this alliance of parties to agree and implement such policies in practice is still questionable. Although French stocks have largely recovered from their initial sell-off in June, we still see numerous opportunities in the space, with all of the following names 4 and 5-star rated by Morningstar.”

Rupert Thompson, IBOSS chief economist, part of Kingswood Group
“The cunning plan by Macron’s centrist party and the left-wing coalition, to drop candidates in the second round of the election to squeeze Marine Le Pen’s far-right party, ended up working rather too well. Rather than the far right ending up with the largest numbers of votes, as had been expected, instead the left did. And their policies are arguably even less palatable to the market than those of the right.

But crucially, they did not gain a majority, so we are now looking at a minority government and a period of ‘cohabitation’. The composition of any coalition remains unclear and the prospect is most likely to be policy paralysis rather than anything radical. As for the market reaction this morning, it was limited. French equities, along with other European markets, are up 0.5 per cent or so. However, France has underperformed by over 5 per cent since Macron called the snap election and looks unlikely to claw this back any time soon.”

Bill Papadakis, senior macro strategist and Samy Chaar, chief economist and CIO Lombard Odier Switzerland
"The election’s outcome removes the risk from the two scenarios we had previously highlighted as potentially disruptive, namely outright majority for either the far right or for the left. A new government in Paris that takes a confrontational approach with the EU is clearly not on the cards. With no clear majority emerging, any radical policy initiatives look unlikely, and the outcome will probably produce gridlock and uncertainty."

See more comentary here about the French elections.

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