In a bid to legitimise his deficit reduction and tax hike plans for the 2026 budget, French Prime Minister François Bayrou has called for a confidence vote in his government – set to take place on 8 September. Wealth managers comment.

France's budget deficit and year-long political impasse has reached a perilous state, triggering a vote of no confidence. Wealth managers comment:

“The news of yet another vote of no confidence should not come as a surprise. The post-tariff European run has, in fact, been led by those companies that have high levels of euro revenue exposure, and so the reminder that all is not as straightforward as some may have assumed in Europe has triggered profit taking in those areas,” Will James, co-manager at Guinness Global Investors said in a note. “The French (and other countries’) deficits need to be tackled at some point for European equities, in aggregate, to make real headway beyond the sporadic periods of outperformance we have seen over the last couple of years.” 

“If this were to happen, it would be very positive. In the meantime, one should expect volatility, perhaps some rotation back to more globally exposed and defensively positioned European companies, and remember things always take longer than one thinks or hopes when it comes to Europe,” James continued.

Meanwhile, Nenad Dinic, equity strategy research and Dario Messi, head of fixed income analyst at Swiss private bank Julius Baer, added that France’s political uncertainty has increased with a confidence vote looming, but its impact on markets has so far been relatively contained. “For equity investors, multinational companies in consumer-related and industrial sectors may be more resilient, while financials are likely to be negatively affected,” Dinic and Messi said in a note.

They highlighted how French equities have decoupled from sovereign yield spreads and traded with notable resilience, since much of the political premium has already been priced in. “Volatility will nevertheless likely stay elevated in the coming weeks. The index’s composition also tempers domestic risk. Financials, which represent only 12 per cent of the benchmark, have been the main drag, falling 8.5 per cent over two days, while consumer-related and healthcare stocks have held up fairly well with losses below 1 per cent,” they continued.

Dinic and Messi expect volatility to stay high in the near term and would favour multinationals with limited fiscal exposure in consumer-related and industrials sectors, which make up more than half of the index’s market cap. Political noise will remain a drag for financials, although they tend to look through this, as the major French banks continue to have attractive shareholder return profiles.

James, highlighted that although a large number of global companies are domiciled in France – for example French multinational EssilorLuxottica, through Publicis to Danone – they generate a large proportion of their revenues elsewhere. “For example, Schneider, the French Industrial company, generated just 5.6 per cent of its revenues in France last year. In fact, Schneider managed to raise €3.5 billion ($4 billion) in the bond markets on 26 August in the eye of the political/deficit storm while demand outstripped supply by 2 to 1,” James said. “The credit markets (the key bellwether at this time) appear to still have confidence in certain French corporates and certainly more than they do in the French sovereign at the moment.” See more here about the Guinness European Equity Income Fund, which is heavily exposed to France, followed by Switzerland, Finland, Germany, the Netherlands, Italy and Denmark, and which has outperformed the index on a one, three, five and 10-year period.

Meanwhile, Dinic and Messi commented that although the spread between French and German government bonds has widened, France’s relatively high debt affordability is expected to limit the potential selloff in French government bonds. “Nevertheless, there is no fast track out of the current political dilemma. As such, the extra spread for French government debt is also not going to disappear so easily,” they added.

Given the level of uncertainty, David Roberts, head of fixed income at Nedgroup Investments, said he is continuing to avoid French bonds despite the modest recent selloff. "We also avoid Italian debt. In each case, we prefer to invest in a diversified portfolio of high-quality investment grade companies," Roberts said. 

Meanwhile, Mark Haefele, chief investment officer at UBS Global Wealth Management, said the latest French developments do not derail his preference for select medium-duration European quality corporate bonds.