The potential formation of a far-right government in the EU’s second-largest economy, France, has sent investors into a frenzy, leading to a large sell-off in French stocks. This came about when Emmanuel Macron triggered snap elections after witnessing significant advancements by Marine Le Pen’s party, the Rassemblement National (RN), in the European elections.
The French stock market suffered its worst week since September 2022, with the Cac 40 index in Paris plummeting over 5 per cent in response to Macron’s unexpected call for elections.
Michael O’Sullivan, an Irish economist and ex-Credit Suisse employee, considers Macron’s decision a colossal risk, echoing the possibility of the RN’s rise to power that would potentially introduce uncertainty into the euro-system. This viewpoint is universally held among analysts.
Morgan Stanley commented that while the extensive sell-off of French banking stocks may have been exaggerated, these equities will likely continue to be affected until the election results are known. This sentiment was echoed by Barclays who also consider the sell-off potentially excessive, adding that there’s no urgency to start repurchasing.
The most probable election outcome, as per Barclays, is a right-wing coalition led by Le Pen’s party. Although such a coalition would be unstable, an outright RN majority could lead to further complications. Policies focused on protectionism, state interference and an immigration halt could not only jeopardise European unity but could significantly increase France’s already considerable public deficit.
Considering the potential for unfunded spending plans to greatly disrupt the markets, as Barclays stated, it’s clear that the financial turmoil caused during the short stint of UK’s previous prime minister, Liz Truss, in September 2022, is still vivid in memory.
In a surprising shift after years of political disorder, investors seem to have a more optimistic outlook on the UK. JPMorgan attributes this to the Labour party’s centrism citing that if they won the upcoming elections, it would likely boost the UK market.
However, the spotlight is now trained on France with Barclays cautioning, “Secure yourself”, indicative of the forthcoming turbulence in the markets.