The French stock market recently experienced a brief rally after a prolonged period of underperformance. However, this upswing may be temporary as France grapples with a persistent political crisis and strained public finances, deterring long-term investors.
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While global markets enjoyed double-digit returns this year, France’s CAC 40 Index is down 1.5%, poised for its worst relative performance against European markets in over a decade. This slump largely stems from President Emmanuel Macron’s June snap election call, which triggered political instability amidst a critical need for fiscal reform. The country’s budget deficit is among the highest in Europe. The recent no-confidence vote further destabilized the government, pushing borrowing costs above Greece’s and prompting warnings from ratings agencies about France’s precarious financial situation.
Political Uncertainty Fuels Economic Concerns
“A deteriorating deficit, or even projections of one, could escalate the situation,” cautions Claudia Panseri, UBS Wealth Management’s chief investment officer for France. She anticipates continued underperformance in the insurance and banking sectors. Despite a seven-day rebound, the best since February, and assurances from right-wing leader Marine Le Pen about a swift budget resolution, long-term concerns remain. Le Pen suggested a slower deficit reduction approach under a new prime minister.
Comparison of borrowing costs in France and other European countries.
Zurich Insurance Co.’s chief strategist, Guy Miller, acknowledges the market’s significant underperformance, suggesting French stocks are becoming more attractive. “France will overcome this,” he asserts, advising investors to position themselves for an eventual market rally. However, others remain skeptical about the rally’s sustainability, predicting limited gains for the CAC 40 in 2025. David Kruk, head of trading at La Financiere de L’Echiquier in Paris, attributes the recent gains to hedge funds covering short positions, emphasizing the lack of fundamental upward momentum.
High Borrowing Costs Strain Key Sectors
Banks and insurers, representing 10% of the benchmark, are significantly impacted by high borrowing costs, contributing to the underperformance of French stocks. Major institutions like BNP Paribas, Credit Agricole SA, and Societe Generale SA held substantial amounts of French government bonds, making them vulnerable to rising rates. Furthermore, elevated borrowing costs compared to the rest of Europe threaten domestic-focused companies. A Goldman Sachs basket tracking such companies has plummeted over 7% in 2024, exceeding double the benchmark’s losses. Strategist Lilia Peytavin predicts this trend will continue. “Domestic-exposed stocks are the key indicator of political risk,” Peytavin states.
Fiscal Challenges and Looming Deadlines
The incoming prime minister will inherit the same fiscal challenges that toppled the previous government, raising doubts about a swift resolution. The new leader must propose a cabinet, appointed by the president, and submit a new 2025 budget to parliament by December 21st. Moody’s Ratings highlighted that the government’s collapse “exacerbates the political stalemate” and diminishes the likelihood of fiscal consolidation.
Alexandre Hezez, chief investment officer at Group Richelieu in Paris, anticipates further underperformance for French stocks compared to other regions, predicting a sustained risk premium on French assets for months to come. The combination of political uncertainty and fiscal strain paints a challenging outlook for the French market, suggesting the recent rally may be a fleeting moment of optimism in a protracted period of instability.
