Markets opened to a surprise French election result this morning (8 July), after the Rassemblement National party failed to capitalise on its strong showing in the preliminary round of voting.
Marine Le Pen’s party ended up in third, winning 132 seats after efforts by parties on the left and centre to keep RN from power through tactically standing down candidates proved successful.
The New Popular Front won 182 seats to become the largest bloc, while President Macron’s Ensemble Alliance won 168. However, none of the three blocs came close to the 289 needed to form an outright majority.
Susannah Streeter, Hargreaves Lansdown head of money and markets, said that although the “worst-case scenario” of an absolute majority for a radical party has been avoided, political stalemate and gridlock looms.
“France has lurched into fresh uncertainty and a parliamentary power grouping of different radical stripes, with the surge in support for the far-left New Popular Front alliance. With the most seats, the aim of the party will be to force a back-track on President Macron’s unpopular reforms aimed at cutting France’s deficit,” she said.
“It wants to reverse the raising of the French retirement age from 62 to 64. Candidates also campaigned to raise the minimum wage and cap the price of essential goods. Given no party holds an overall majority, it looks like it will be very hard to push through a specific agenda, but there will be a big push over the coming year for concessions and compromises.
“But for now, a legislative and policy vacuum looms as the task of forming a coalition government amid such political fracture gets underway.”
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Michael Field, European market strategist at Morningstar, added: “The election of a left-wing alliance would usually not be something for markets to celebrate but given the inherent fears investors had around a right-wing government, this announcement will very likely be a welcome one.
“The New Popular Front’s manifesto outlines its wish to increase minimum wage materially, as well as freeze energy and basic food prices. The manifesto proposes all of these measures be funded by the re-introduction of a wealth tax and an increase in income tax for high earners.
“As such, concerns for sectors such as utilities that existed over recent weeks when RN was leading in the polls may still be an ongoing concern for investors under this new party. However, the ability of this alliance of parties to agree and implement such policies in practice is still questionable.”
Possible equity allocations to France will be reduced
On the likely market impact of the result, Frederic Leroux, a member of the strategic investment committee at Carmignac, said it is 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,” he said.
“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 ‘Europeanised’.”
