France’s parliamentary election has sparked concern among investors as the country’s risk premium continues to rise, impacting not only the French market but also stocks in the wider European region. Citi’s head of global equity strategy, Beata Manthey, highlighted two possible scenarios that have not yet been fully priced in by markets, potentially leading to further volatility in European stocks.
One of the key concerns surrounding the upcoming election is the possibility of a far-right or far-left majority government. Both the hard-right Rassemblement National (RN) party and the left-wing Nouveau Front Populaire (NFP) coalition have put forth tax and spending plans that could lead to bond market volatility and even a potential debt crisis if implemented hastily. The market has not fully priced in the impact of either of these parties gaining a majority, leading to uncertainty among investors.
Citi’s scenario analysis suggests that the market is currently pricing in a benign outcome or a gridlock scenario, but is not fully prepared for the implications of a far-right or far-left majority government. The potential movements in the spread between French and German bond yields have already hit a 12-year high, indicating growing unease among investors. The uncertainty surrounding the election outcome has led to caution in the market, with European stocks trading at a significant discount compared to U.S. stocks.
Valuations and Political Risks
Despite the increased political risks in Europe, valuations have not yet been triggered to reflect these concerns. The stretched positioning of investors in the European market, particularly in European banks, has unwound to a more neutral stance. However, the gap in valuations between European and U.S. stocks remains substantial, suggesting that there is room for further adjustment based on the election outcome. Manthey emphasized that European equities are more vulnerable to political changes compared to other developed markets.
If the French election results turn out to be unfavorable for the market, with either a far-right or far-left majority government, the consequences could be far-reaching. The interconnected nature of European markets means that a substantial sell-off in the CAC 40 index could lead to spillover effects in other European countries. The close correlation among European stocks underscores the need for investors to closely monitor the election outcome and be prepared for potential volatility in the coming weeks.
France’s parliamentary election has injected a sense of uncertainty into the European market, with investors closely watching the potential outcomes and their impact on stocks in the region. The market’s response to different scenarios, particularly the rise of far-right and far-left parties, is still evolving, highlighting the need for caution and vigilance in the face of political risks.