French Elections, Post-Election Scenarios and Market Impact According to International Managers

The new Popular Front wins the second round of legislative elections, but fails to secure an absolute majority in parliament. Government negotiations begin. Managers see a possible widening of sovereign spreads and equity volatility.

The New Popular Front (NPF) has unexpectedly won the second round of France’s legislative elections, taking 182 of the 577 seats in the National Assembly. It is followed by President Emmanuel Macron’s Ensemble with 168 deputies, while Marine Le Pen’s right-wing National Rally (RN), which won the first round, has fallen to third place with 143 seats, contrary to expectations. poll results do not give a majority country, where a party would need 289 seats to govern alone. That opens a period of negotiations in which the parties will try to forge alliances to form a governing coalition. Macron, meanwhile, has asked outgoing Prime Minister Gabriel Attal, a member of Macron’s own party, which currently lacks a majority, to stay on until a new government is in place.

Risk of political blockade

French assets could be hit by the onset of a phase of uncertainty due to a divided parliament, according to expert managers. They foresee widening spreads between French sovereign bonds and German bondsAnd stock volatility. In a divided parliament, the hypothesis of Frédéric Leroux, member of the Carmignac Strategic Investment Committee, is that a majority will be formed depending on the measures that will be voted on, in conditions where questions of consensus will be particularly rare, leading to a deadlock that will prevent any major legislative initiative. “France will manage its daily life in this way until the next dissolution (in more than a year) or the resignation of the President of the Republic in a context of an even worsening of the state accounts,” Leroux analyzes. Zehrid Osmani, head of Global Long-Term Unconstrained Equities and senior portfolio manager at Martin Currie (part of Franklin Templeton), agrees that “this divided assembly could at worst lead to political apathy, or certainly to political apathy.” slow down political decision making“.

Possible widening of sovereign spreads

For this reason, according to Leroux, It is difficult to imagine that the French sovereign credit is no different from the German credit.“The difference between them, which currently fluctuates between 70 and 75 basis points, will gradually widen, increasing the cost of French debt,” he warns. volatility of French government debt: “French OATs have 60% foreign capital. They are sensitive to foreign flows, so some volatility would not surprise us. The roadmap should be to buy on the downside.“, – says the expert.

Otherwise, Osmani expects French spreads to gradually narrow again as the market situation becomes clearer and a prime minister is appointed, “which could take a few weeks until the parties reach an agreement,” he said. According to Giorgio Broggi, a quantitative analyst at the firm ManifarmWhile it will take a lot of political effort to create a working coalition, the election result opens up a globally positive scenario for markets: “In fact, managed to avoid a populist majority that could have caused financial shocks and volatility“, It is said.

New government: three possible scenarios

For Jamie Ross, portfolio manager at Janus Henderson, the key is the policy direction of the government coalition, which is the result of a struggle between political forces. Broadly speaking, Ross sees three potential outcomes that will impact markets in different ways. “The first is a kind of broad coalition led by the centerwith the participation of representatives of the left and right forces. This could be considered a favorable result for the markets,” the expert explains. coalition formed by the New Popular Front“Markets will see this as a less favourable outcome, but the balance of power within the New Popular Front will be the deciding factor,” he says. Finally, if the political struggle reaches a complete stalemate, the likely outcome will be some form of technocratic government. That would be an outcome that markets would welcome,” he says.

The problem of public debt

France has a debt-to-GDP ratio of over 100%, so any increase in government spending will be a particular focus for market participants. “The more the coalition leans to the left, the more the market will worry about possible reversal of pension reform“freezing prices, raising government wages and worsening relations with the EU,” warns Janus Henderson.

The question of the repeal of the pension reform, which both CCN and RN are demanding, also worries Vincent Chaigneau, head of research at Generali Investments: “If they dare to do so, it will be a very bad sign for the markets,” he says. “The far left and the far right have slowed down, but the election results do not favour political stability or a promising reform programme,” warns Chaigneau.

Therefore, according to PGIM, the next obstacle is the negotiations on how to reduce the budget deficit. Filippo Diodovic, senior market strategist at IG Italia, agrees: “Given that last year the public deficit exceeded 5% of GDP, and with the opening of the excessive deficit procedure against France by Brussels, the results of the left bloc elections could raise some concerns,” says Diodovic, although, according to the expert, these concerns will not necessarily have consequences, since the presidential majority has not collapsed and is in second place.

Impact on the stock market

The news that the French National Assembly will be dissolved as a result of the European elections has sent all French stocks falling uniformly, signaling an indiscriminate cut in French spending. Now that the worst-case scenario of populist parties on the left and right winning a majority in parliament appears to have been avoided, an entry point may be available. interesting for French stocks. This is also due to the fact that less than 20% of the CAC40’s profits are generated in France, so the main French stock index has little correlation with the development of the national economy.”Top export companies should lead to gains on the French stock market.which will suffer from a clear and prolonged lack of internal dynamism,” they explain from Carmignac.

Fears ahead of presidential elections

In any case, the specter of the 2027 French presidential election is looming larger and larger. “This represents a key risk that investors should focus on, in the event that the French centrist coalition lacks a charismatic leader who could replace President Macron, who will serve out his second and final term,” concludes Osmani.