Investors get the centrist government in France
Regarding France’s tumultuous politics, the current deadlock is likely the most favorable outcome that investors could have anticipated.
The second round of French parliamentary elections resulted in a hung parliament, as anticipated, but with a different composition than initially predicted. Instead of securing the top position, Marine Le Pen’s far-right and anti-immigrant National Rally ended up in the third place. The socialist New Popular Front alliance emerged as the winner, while the party of President Emmanuel Macron and its allies secured the second position in a surprising turn of events.
The coordination between leftists and centrists led to this outcome. In numerous local elections, contestants withdrew from the campaign in order to prevent the fragmentation of votes against the extreme right-wing contenders. However, none of the political parties now holds a clear majority, resulting in a state of political deadlock in the country. Surprisingly, this was the desired result for financial markets.
The CAC 40 experienced a sharp decline at the onset of the elections in June due to concerns about the possibility of a National Rally government that could challenge the European Union with financially ambitious proposals. Subsequently, the French stock benchmark experienced an increase in value, as the initial set of results indicated that the far-right party would not secure a majority.
However, the markets continued to experience instability due to the emergence of the New Popular Front, which intensified existing fears. The goals of this coalition, led by the leftist firebrand Jean-Luc Mélenchon, likewise encompass increased government expenditure alongside hefty tax hikes.
On Monday, the CAC 40 experienced an initial decline. Investors may have responded to Mélenchon’s declaration that there will be no agreements with the centrists. However, it promptly recovered, experiencing a little increase in early-afternoon trade in comparison to the closing price on Friday.
The latter reaction is more logical. Indeed, there are uncertainties regarding France’s approach to managing its budget deficit, which reached 5.5% of its gross domestic product in 2023. Consequently, the European Union has initiated a “excessive deficit procedure” against the country. Macron may need to acknowledge the necessity of undoing initiatives, such as increasing the retirement age.
However, a fiscal crisis is unlikely to occur as the European Central Bank has ultimate power over France’s bond market.
The extent of Macron’s policies’ impact on economic growth is uncertain, especially considering the opposition from unions and large portions of the public, which led to the notable “yellow vest” protests in 2018 and 2020.
The key concern for sectors that have been heavily impacted in the stock market, including as banks, energy corporations, and infrastructure operators, is that the likelihood of significant tax hikes, nationalizations, and a prolonged conflict with Brussels appears to have diminished compared to a few weeks ago. Regardless of Mélenchon’s statements, the left will be compelled to either make concessions or establish a minority administration, which might potentially unsettle investors but would lack the ability to enact legislation.
There is little reason to support the lower valuation of lenders like Société Générale and particularly BNP Paribas, which is one of Europe’s most intriguing banks and currently trades at 0.66 times its tangible book value. It is probable that the same applies to companies like energy utility Engie and infrastructure-concessions leader Vinci, as they have experienced a 7% decrease in their market value since the end of May.
These elections are primarily indicative of Macron’s vulnerability rather than being the root cause of it. Following a tumultuous month, French politics has returned to its long-standing state, with the extreme right gaining influence and pressuring the left to support a centrist agenda that is unlikely to accomplish significant results due to its lack of popularity. Macron assumed the presidency on a platform opposing Le Pen, but over the course of seven years, he has been unable in garnering widespread backing for his pro-business agenda.
Le Pen asserted that this might ultimately lead to her triumph becoming unavoidable, as she stated upon the release of preliminary results. Currently, however, it is essentially in line with market expectations.
