French stocks are expected to face increased volatility due to the upcoming legislative elections, strategists at Goldman Sachs have warned.
The CAC 40 index, which includes 40 of the largest companies listed on the Paris Stock Exchange, experienced its worst performance since March 2022 last week, plummeting more than 6%.
This downturn was triggered by the announcement of a snap election, causing market jitters over the potential victory of the far-right National Rally and the implications for fiscal policy and economic stability.
Market reaction to snap election
The prospect of the far-right National Rally securing a win in the elections on June 30 and July 7 has unsettled investors.
Concerns center around the possibility of populist fiscal policies, measures targeting banks, and a “Liz Truss-style financial crisis.”
This fear led to a significant equity sell-off, with borrowing costs also rising sharply. The spread between French and German 10-year bond yields widened by 25 basis points, reflecting the heightened political risk.
Goldman Sachs’ outlook
Goldman Sachs strategists expect the spread between French and German bond yields to remain wide in the coming weeks, maintaining pressure on French domestic stocks, particularly banks that are sensitive to sovereign spreads.
In a research note published on Friday, the strategists advised investors to look towards defensive sectors, such as healthcare, amid the elevated political uncertainty.
National Rally victory and market response
A victory for the National Rally could further impact French domestic stocks negatively. However, Goldman Sachs notes that the party might adopt a more business-friendly approach in the long run if it aims to secure a candidate victory in the 2027 presidential election.
Alternatively, the possibility of a hung parliament and political deadlock could mitigate the risk of a severe market reaction but would likely lead to continued pressure on specific domestic stocks exposed to sovereign spreads.
Limited French exposure in CAC 40
According to Sharon Bell, senior equity strategist at Goldman Sachs, the CAC 40 has only around 20% exposure to the French domestic market.
“That’s not zero French exposure, and people obviously are adding an extra risk premium to France at the moment given the upcoming election.”
She noted that while the market has performed well in recent years, some companies are richly valued, with 80% of their revenue coming from outside France, particularly from dollar-earning operations.
Focus on small caps and domestic names
Bell emphasized that the sell-off in French stocks might have been an overreaction, suggesting that the most vulnerable are small caps and domestic French names.
Long-term implications
The outcome of the snap election and the subsequent political landscape in France will play a crucial role in determining market confidence and stability.
Investors will closely monitor the developments to gauge the potential impact on fiscal policies, regulatory environment, and economic growth.
The ability of the new government to navigate these challenges and implement business-friendly policies could significantly influence the performance of French stocks in the long run.
As France heads towards its legislative elections, the market remains on edge, grappling with the uncertainty and potential ramifications of a far-right victory.
Goldman Sachs’ cautionary stance highlights the need for investors to stay informed and adopt a strategic approach, focusing on sectors and stocks less exposed to domestic political risks.
The coming weeks will be pivotal in shaping the future trajectory of French stocks and the broader economic landscape.
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