Fund managers are split on whether the chaotic result of the French elections over the weekend is good or bad for the French market.
Alex Everett, investment manager at abrdn, said there was “relief” as Marine Le Pen’s National Rally party was “convincingly denied” their “coveted” absolute majority by a “surprisingly strong result” for the left-wing coalition New Popular Front.
There had been concerns that Le Pen would win, according to Frederic Leroux, a member of the strategic investment committee at Carmignac, after her “headline-grabbing victory in the first round of elections”.
The most likely outcome from the hung parliament is that there will be a deadlock on many key issues, with consensus decisions becoming “particularly rare”, he said.
However, although a hung parliament is arguably the ‘least bad’ outcome, fund managers remain wary.
Everett said: “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.”
Turning to equities, “the news of the dissolution of the French National Assembly has caused a uniform fall in all French stocks, showing an indiscriminate reduction in allocations to France,” Leroux said.
Investors’ allocations to France could be “permanently reduced” by the election result, he suggested – despite just 20% of companies’ profits in the CAC40 index (the main French benchmark) being generated in France.
However, there could be pockets of investible assets, he noted, including exporters, which “should once again outperform the French equity market”.
Zehrid Osmani, head of long-term unconstrained at Martin Currie, was more bullish than his peers. While 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”, he was calmed by the fact it failed to get a majority.
The left-wing coalition does not have control of parliament and “will find it hard to find backing for policies that are overly aggressive”, he said, which limits the risk that France deviates from its current policies.
As a result, he suggested the sell-off in French equities ahead of the elections “could be overdone”, also alluding to the index’s large proportion of overseas earnings.
On bonds, Leroux and Osmani differed in their opinions. The former expects the spread between French sovereign credit and their German equivalents to rise. Currently hovering between 70 and 75 basis points, this would increase the cost of French debt and weaken the French economy, he said.
However, Osmani expects spreads to gradually narrow as the market gets to “understand the situation more clearly”.
Looking ahead, the “spectre” of the French presidential elections in 2027 “looms nearer and shouts louder”, he added. It represents the “key risk” that investors should focus on if investing in the country, particularly if the French centrist coalition “do 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,” he concluded.