France election turmoil: European equities amidst the upheaval

Key points

• France is facing significant political upheaval as President Macron has called for a snap election

• French stocks have slumped, with benchmark stock index CAC40 down 2.7% since Friday’s close and breaking below the long-term range low of 7,900. EuroStoxx 600 is also down 1.2%.

• While political uncertainty poses risks, it can also offer strategic entry points for long-term investors.

• European stocks are seeing tailwinds from growth rebound, ECB rate cut, cheaper valuation and better diversification.

• Luxury brands are a key constituent of the French market, and offer exposure to a market that boasts of high growth, high margins, and a resilient business despite high inflation and economic uncertainty.

France is experiencing significant political upheaval, with calls for snap elections amid a fragmented political landscape after President Emmanuel Macron’s crushing defeat in the European Parliament election.

This move from Macron is seen as a significant risk, given that it brings the focus back on his perennial battle with far-right rival, Marine Le Pen.

What to expect from the French elections?

• The election will take place over two rounds beginning June 30, and culminating on July 7.

• Macron’s position as head of state is unlikely to be directly affected by the upcoming vote, but it could be a show of Le Pen’s growing popularity ahead of the 2027 presidential elections.

• Macron may be betting on using the snap elections as a chance to question the increasing far-right move in Europe and re-establish a stronger, moderate majority. However, there are considerable risks that the move could backfire.

• The outcome of the election could also impact Macron’s ability to push through legislation and his ability to pick a like-minded prime minister.

This adds to France’s deficit risks and concerns over a growing debt load which were brought to light by a credit rating downgrade from the S&P last months. Any attempts to rein in spending and borrowing could run into roadblocks amid a weakened government mandate.

Market reaction

Political instability is never a good thing for markets. Europe has remained at the centre of geopolitical concerns, and the increasing far-right popularity as well as French snap election risk has meant that investors may add a political risk premium to euro-zone assets.

French stocks have slumped, with benchmark stock index CAC40 down 2.7% since Friday’s close and breaking below the long-term range low of 7,900. Banks have led the losses, with yields in French bonds surging to the highest since November on rising fiscal concerns.

Source: Bloomberg. Note: Past performance does not guarantee future performance

Investment implications

While political uncertainty poses risks, it can also offer strategic entry points for long-term investors. By focusing on promising sectors and employing robust risk management strategies, investors can navigate the current volatility and potentially benefit from the market's response to the upcoming elections.

As our Head of Equity Strategy, Peter Garnry, argues in this podcast, the overall European equity narrative remains unchanged for now despite these political jitters.

European equities may have lost on the technology revolution, but the market is more diversified and undervalued. European stocks also face tailwinds from a Eurozone growth rebound and the start of ECB rate cuts. The two biggest engines for the European market are its pharmaceutical industry as well as the luxury industry. In addition, the ongoing war in Ukraine, Middle East tensions and the prospect of a second Donald Trump presidency in the US have driven strong returns for European defence stocks.

French equities could face headwinds into the elections, but it is worth noting that only 15% of the revenues for the constituents of CAC40 are sourced within France. As such, French stock market is one that depends more heavily on global economic conditions.

France is home to several multinational corporations with global reach, such as LVMH (luxury goods), TotalEnergies (energy), and Airbus (aerospace). Investing in French stocks provides exposure to these companies and their international operations.

The luxury sector remains one of the most interesting ones in France, given its high growth, high margin, strong brand recognition, and a strong appeal among the consumer. There are several ways to gain exposure to the luxury market, as discussed in the article “Investing in Luxury”. The article talks about luxury sector ETF Amundi S&P Global Luxury UCITS ETF and its constituents, as well as the most popular luxury brands such as Louis Vuitton, Moët & Chandon and Givenchy (LVMH), Hermes, Tapestry (with brands such as Jimmy Choo, Versace, and Michael Kors), and others. At Saxo, we also have a Luxury Goods Equity Theme Basket which identifies several stocks that provide the best pure exposure to the global luxury market.

There are, however, key risks to consider when investing in French markets. Elevated political uncertainty or changes in political leadership could have implications for economy and markets. Foreign investors may also need to assess the impact of a potential weakness in euro on their investment returns relative to their home currency. Luxury stocks, in particular, are even more closely tied to global economic conditions given these are discretionary purchases. ESG risks are also worth considering, given that luxury companies are criticized for their environmental impact. Luxury stocks also usually have high valuations due to their high growth expectations. 

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