In the year of the record elections, uncertainty comes from the French vote with the ever-increasing probability of a Parliament “suspended”. What are the possible implications for the markets? The surprise announcement of the French parliamentary elections has seenor the French stock market underperform in June. The French CAC 40 index fell -6.4% versus -2.6% for the Eurozone index, the MSCI EMU, writes Martin Skanberg, Fund Manager, European Equities, Schroders explaining that “this is largely due to uncertainty over the economic programme of RN, which was expected to win a large number of seats.
French vote and markets: what implications?
In particular, the shares of French national companies (banks, utilities, infrastructure operators) have been under pressure. The nature of a snap election meant that little concrete information was available about RN’s plans. Leader Marine Le Pen had previously indicated a desire to nationalize toll road assets.”
French stocks – continues the expert – then recovered a little, with the CAC 40che gained 2.6% in the week after the first-round vote, which indicated a hung parliament. That result has now been confirmed, but with the left-wing alliance emerging as the largest bloc, followed by the centrists.
A suspended parliament, with Emmanuel Macron still in his place as president, will probably mean a period of uncertainty with few results on the political front.
Bond
The results of Sunday’s election did not bring the clarity that was hoped for. The ongoing uncertainty over the formation of the government means that many questions remain unanswered. It could take several weeks to clarify them and each scenario could offer very different outcomes for France’s economy and finances, he stresses. James Ringer, Fixed Income Portfolio Manager and Thomas GabbeyFund Manager, Schroders.
At present, “the probability of a suspended parliament has increased, becoming the most likely scenario. With it comes fiscal paralysis, which given the budget concerns is the most market-friendly for now, at least until the budget negotiations in autumn 2024.”
In the meantime, “we expect the flow of newsand will maintain volatility relatively high across all Eurozone bond asset classes.”
Volatility, let’s take stock
With great uncertainty already priced into French government bonds ahead of the second round of elections, the outcome It provided some immediate relief. Attention now turns to the strength of the left-wing coalition and, realistically, the inability of the minority PNF government to deliver on the expansionary promises of its fiscal manifesto.
“We think it is limited, but the fragility of France’s fiscal position remains at the forefront and with the country already under scrutiny by the European Commission, it remains to be seen how the new government will address the challenges of the excessive deficit procedure,” the expert continues.
For these reasons, for the time being, “we remain neutral on French sovereign risk. We also adopt a neutral stance on peripheral markets, especially those most vulnerable from a fiscal point of view and with contagion effects, such as Italy. Compared to fundamentals, we have long considered these markets among the most expensive.
The scenarios
Similarly, theand bond ratings French guaranteed bonds, which have remained relatively stable compared to senior financials, are not as compelling as at the beginning of the year and we are less constructive on them.”
We stay “relatively optimistic on European investment grade credit more generally, although French risk in our strategies remains relatively low. Similar to the price action we are seeing in sovereign spread France-Bund, French banks, which were most vulnerable during the sell-off, have already started to retrace their previous weakness.”
At some point, “we expect the indiscriminate nature of the market volatility may open up some idiosyncratic opportunities, but it’s not the time yet.
Our feeling is that the outcome of the elections will not significantly affect on the conditions of monetary policy. While fiscal indiscipline in member states is a cause for concern, it is unlikely to preclude the easing cycle that the ECB has already embarked on, thanks to progress on the disinflation front. This should provide some Support for European assetsfixed income in the medium term”.
