Is France At A Turning Point?

Following on from my thoughts on the European election, the French market has continued to flounder with the CAC40 down nearly 6% over last week. When President Macron called the parliamentary election, it seemed like a “back me or sack me” move, probably in the belief that the lurch to the right in the European elections was a protest vote, and that the French electorate would come back to the middle ground when faced with the possibility of Le Pen’s Rassemblement Nationale (RN) heading the poll. RN could still be the largest parliamentary group but fall short of an absolute majority. Under the French system, Macron can remain as President without his party holding a majority and it could be that his party will unite with parts of the left to form the next government. This would be a strange outcome in as much as the political mood in France has clearly swung to the right, interestingly among younger people too, but the county faces the prospect of being governed by a leftist influenced Renaissance, Macron’s party, the parties on the left having formed an alliance to keep RN out.

Renaissance has 169 seats in the National Assembly out of 577. RN has 88. To win an outright majority RN would need 289 seats. There are two rounds in the French elections to be held on 30th June and 7th July. This is unlikely to favour the RN, since typically the two or three highest parties go through to the second round and left and centrist inclined voters may vote tactically to prevent RN winning a majority. In the less likely event that RN wins an outright majority in the first round with 50%, Macron as president would have to ask a member of RN to become PM, probably Jordan Bardella, and there would then be a period of “cohabitation”. Macron would stay as president, commander-in-chief, and head of foreign policy, but would lose power to set domestic policy.

This state of affairs would likely create further uncertainty in stock markets and bond spreads might rise, as indeed they have done of late. From an investment standpoint we have been very underweight in French stocks compared to the index for some time, which is helpful in the current context.  Longer term there will undoubtedly be opportunities to pick up shares at cheaper valuations, but it has been the lack of availability of self-financing growth stocks that has kept us largely out of the market and turned us to other markets in Europe in recent years.

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