French President Emmanuel Macron’s surprise announcement in June that the National Assembly would be dissolved, following the unexpected outcome of the vote in European electionshas led to an increase in risk aversion in European markets, which French in particular. This is according to Gilles Guibout, head of European Equities at AXA Investment Managers.
Faced with a possible loosening of budgetary discipline in the event of a victory of the most extreme French political forces, both on the right and the left, the European stock markets – Guibout underlines – they responded with greater cautionclosing the month with a minus sign. They therefore did not benefit from the first rate cut by the European Central Bank (ECB), nor from the continued normalization of inflation and the decline in job creation in the United States that allowed an easing of the American 10-year rate and pushed the S&P 500 to new highs.
Political risk weighs heavily
“The European and French elections have brought uncertainty and until there is greater clarity on the French government’s position on deficit containment, it is likely that the market volatility persists. In this context, the stocks that are most dependent on domestic events and least exposed at an international level are suffering the most.
Despite the ongoing uncertainty, we can draw two important indications from last weekend’s election results. The more radical macroeconomic proposals and potentially market-shattering proposals have come from the extreme ends of the political spectrum, from RN (Rassemblement National) and LFI (La France Insoumise). None of these programs can now be fully implemented, regardless of who becomes prime minister, since alternative groups hold the majority and can stop these proposals by presenting motions of no confidence. Furthermore, these more extremist parties are not even able to block decisions coming from a possible centrist coalitionsince even together they do not form a majority.
France does not have a history of forming coalitions (as happens, for example, in Italy) and this will make it even more difficult. more difficult to adopt compromises necessary to form a functioning government. We therefore expect this government formation process to proceed by trial and error until a workable solution is reached.
European companies remain attractive
French companies with a strong international exposure, such as L’Oreal, LVMH, Publicis or Veolia – highlights Guibout – have been less impacted by political events.
And in general the European companies remain attractive thanks to their global exposure, with around 60% of their revenues coming from global markets and around 25% from the US market. Increased political uncertainty in France and the US – with the presidential elections approaching – could fuel some volatility.
After mixed messages from companies in recent weeks, irhalf-year results they will be examined carefully from the markets to assess the solidity of the economic improvement expected for the second part of the year. revaluation recorded by a small number of companies that have contributed largely to the market performance over the last nine months constitutes a point of particular attention and leaves little room for disappointment in future releases by companies.