Following the second round of voting in France over the weekend, Marine Le Pen’s National Rally have fallen short in the French parliamentary election while the New Popular Front (NFP) have emerged as the dominant force according to the exit polls.
With France now looking likely to have a hung parliament, the shape of which is still unclear at the time of writing, industry experts have shared their reaction as to the impact this results may have on global markets.
Johann Scholtz, Senior Equity Analyst and banking expert at Morningstar said: “Significant political uncertainty will likely remain after no grouping gained a majority in the second round of the French elections. It could take weeks, if not months, to form a new government, or France may end up with a caretaker government for a year, when it can hold fresh elections.
“Markets may view the centrist parties’ stronger-than-expected performance as positive. The New Popular Front bloc (made up of the Communist Party, the hard-left France Unbowed, the Green Party and the Socialist Party) gained the most seats. Its fiscal policies appear as unrealistic as those proposed by Mariane le Pen’s National Rally. Concern around higher credit spreads for French banks and their impact on their funding cost will remain.
“Despite the increased political risks, 4-star-rated BNP Paribas remains one of our top picks in the European banking sector, trading at a 26% discount to our fair value estimate. BNP trades at a 40% discount to the European banking sector’s average price/tangible book ratio and it offers a juicy 7.5% dividend yield. While we expect BNP’s midcycle profitability to lag the sector somewhat, we do not believe it justifies such a steep discount, especially if we consider BNP’s remarkable historical earnings stability.
“France contributed only about 25% of BNP’s revenue in 2023, compared with 40% for Societe Generale and 46% for Credit Agricole. BNP has deployed some excess capital into several small bolt-on acquisitions that should support incremental earnings growth. The increased volatility in European capital markets due to the French elections may be a positive for BNP’s investment banking franchise as its clients will look to hedge risks on rates and currency, supporting volume, and wider spreads will support trading margins.”
Richard Carter, head of fixed interest research at Quilter Cheviot: ‘We anticipate that the French election results will elicit a muted market reaction given that investors had largely anticipated the outcome where the Rassemblement National would not secure a majority. However, there is a growing concern that the market’s current optimism may not fully account for the complexities introduced by the hung parliament. The political deadlock poses significant risks, particularly in light of France’s challenging fiscal position. Moreover, the policies of the far left will be viewed as very unfriendly by markets as well, so the hope is that some sort of moderate left coalition will emerge.
‘Two weeks ago, the European Commission’s placed France under an Excessive Deficit Procedure and with the parliament in disarray, the likelihood of passing necessary budget cuts diminishes, complicating France’s efforts to adhere to the EU’s stringent budgetary regulations and to steer its public debt towards a more sustainable trajectory.
‘The euro experienced a slight decline after exit polls, slipping around 0.2% and French bond futures also saw a downturn. The yield on France’s benchmark 10-year government bond has recently surged past 3.3%, a peak not seen in the last 12 months, following President Macron’s decision to call a snap election in June, reflecting the market’s apprehension about France’s fiscal stability and the broader economic implications.
‘While the election outcome may be viewed as a good result in the sense that it avoided a more disruptive scenario, it falls short of being a good outcome due to the ensuing uncertainty and the formidable fiscal challenges that lie ahead for France. Investors will need to remain vigilant as France navigates through this period of political and economic uncertainty.’
GianLuigi Mandruzzato, Senior Economist at EFG Asset Management said: “Defying polls, the French elections saw the leftist New Popular Front win a relative majority in the National Assembly followed by Ensemble, President Macron’s coalition, although it lost more than 70 seats.
“Le Pen’s RN, which gained the most seats, remained distant from the majority that most polls pointed to before the vote, showing that the “Republican block” strategy to exclude the far-right from power was effective, to some extent.
“However, the lack of a majority in the National Assembly points lengthy negotiations before a new government can be sworn in, keeping high the uncertainty around French and EU policies.
“Main concerns relate to French public accounts, that needs to be fixed and where there is a wide divergence among the left and the centrist bloc visions of how to do it, and EU foreign policy.”
“European assets, including the euro and government bond yields, risk remaining volatile for a while, while the uncertainty will burden the economy, possibly increasing the pressure on the ECB to cut rates again or use its asset purchases to limit the impact on the transmission of monetary policy.”
