Carmignac: Commentary on the French parliamentary elections

Carmignac: Commentary on the French parliamentary elections

Politics France
Parijs Frankrijk

Frederic Leroux, member of the strategic investment committee at Carmignac, comments on the French parliamentary elections:

As expected, the organisation of an anti-Rassemblement National "republican front" succeeded in preventing the far right from rising to power after their headline-grabbing victory in the first round of elections.

The surprise in the second round came from the scale of the Rassemblement National's defeat.

The new Assembly has no majority. The right-wing parties secured the largest number of seats, but their main component - the Rassemblement National – will not be allowed to enter into a coalition with the centre. Meanwhile, on the left, La France Insoumise (far left), will also be unable to participate in an enlarged collation. Meaning there is no room for a majority coalition between the rest of the left and the centre.

Majorities will therefore be formed according to the texts to be voted on, in a context where subjects of consensus will be particularly rare. The most likely scenario is that of a deadlock preventing any major legislative initiative. France will then manage its day-to-day affairs, until the next dissolution (in over a year's time) or the resignation of the President of the Republic, against a backdrop of further deterioration in public accounts.

What can we expect from the markets?

It's hard to believe that French sovereign credit won't diverge from that of Germany. This spread, currently hovering between 70 and 75 basis points, is likely to rise gradually, increasing the cost of French debt and contributing to the weakening of the French economy.

On the equity markets, despite less than 20% of CAC40 profits being generated in France, it’s possible that asset allocations to France will be permanently reduced. The news of the dissolution of the French National Assembly had caused a uniform fall in all French stocks, showing an indiscriminate reduction in allocation to France. Now that the market’s apparent ‘worst-case scenario’ has been averted, superior exporting companies should once again outperform the French equity market, which is going to be affected by a clear and lasting lack of domestic dynamism.

The French situation also seems likely to contribute to the weakening of the euro, given the stalling of the Franco-German political engine. The lack of economic initiative risks becoming ‘Europeanized’.