A deep-dive on the French elections

A deep-dive on the French elections

Amidst elevated uncertainty, a hung parliament is the most likely outcome 

The French head to the polls on June 30 and July 7 to elect their members of Parliament. How does that work? There are 577 seats up for grabs, so a party needs 289 seats to have an outright majority to govern. Anything less, in general, would mean that several parties may try to work together to form a coalition. This has been the case since 2022, with a coalition supporting President Macron given that his party does not have an outright majority. This time, it seems slightly different. Alliances have already been made, and they seem hard to change given the different economic, fiscal, social and geopolitical policies. 

Current opinion polls put the right-wing party Rassemblement National (RN) in the lead, followed by the left-wing alliance of the Nouveau Front Populaire (NFP), with the centrist alliance supporting President Macron coming third. However, assuming that the polls correctly predict the outcome (which isn’t guaranteed), the right-wing lead does not translate into the RN gaining an outright majority. This is because the election takes place in two rounds. Those coming first and second in the first round do qualify for the second round, as well as any other gathering more than 12.5% of registered votes. Three candidates could, therefore, go for a run-off in the second round, which adds a layer of uncertainty to seat projections. The current projections show that the RN still falls short of an outright majority, even with the help of some candidates for the conservative centre-right party, Les Republicains (LR).  

A hung parliament where no one has an outright majority, therefore, is the most likely outcome according to the polls, though even this scenario doesn’t have a very high probability to make it a ‘done deal’. Under this scenario, it’s almost impossible to predict who the next prime minister could be. In addition, there could be a political stalemate with little room for new policies to be implemented until the presidential elections in 2027. That said, a scenario where the RN gains an outright majority is possible, though perhaps less likely, given the strong lead the party holds in the polls. And there’s a third scenario, with an even smaller likelihood, where the leftist alliance wins. The coalition supporting President Macron could surprise, too, but that seems very unlikely.  

Limited fiscal space means significant spending proposals are unlikely to gain meaningful traction 

The new government will have little room to implement big-bang spending policies as France has fiscal constraints. With a public deficit of around 5% of GDP, France received an official warning from the European Commission (EC) last week for exceeding the European Union (EU) deficit limit of 3% of GDP (the so-called Excessive Deficit Procedure), alongside Italy, Belgium, Malta, Hungary and Poland. These countries must now work with the EC on a fiscal consolidation path in the coming months. Of course, relations with the EU under a RN government could be more difficult, so negotiations could be tough. And there could be some fiscal slippage, too, though in our base case we think this is unlikely to be to the extent that it would cause severe stress on France’s sovereign market and financial system. 

This is because the RN has watered down its proposals, trying to reassure markets that it would not put France’s financial stability at risk. In particular, RN no longer advocates euro exit. Even fiscally, while it could attempt to spend more than warranted by France’s debt sustainability conditions, we think there would be limits. This is because, if French sovereign funding conditions were to become difficult, as we’ve seen when the UK announced large unfunded fiscal plans under Liz Truss’s Government, it would make very difficult to secure market funding to implement any policy. In a sense, our base case looks similar to what happened with the current Italian Government, where a right-wing coalition did generate some volatility but, probably learning from past episodes in Southern Europe, more often stuck to mainstream policies for the most part, creating limited market volatility and, in general, not much of a performance drag on Italian assets. 

What does this mean for markets?
Under any of the scenarios outlined, we can expect market volatility around the two rounds of the election, given the uncertainty, before fundamental factors drive markets again over the medium term. French government bonds are the most exposed to the unfolding of events, given the (moderate) fiscal uncertainty. The spread between French and German government bonds could widen, albeit moderately, as it has already moved around 25 basis points higher. Turning to equities, the CAC 40 is currently finding support after having corrected around 10% since the European election. But we could see French stocks underperforming their European peers in any rebound (which doesn’t mean a negative performance). Although French and European stocks are on levels which, fundamentally, one could judge as ‘attractive’, we think it’s too early to add these markets until the underlying uncertainty clears. We are currently holding slightly less European equities relative to our long-term allocation. Once uncertainty clears after the election, as we see the European economy on a gradual recovery path, further supported by one or two additional rates cuts by the European Central Bank (ECB) before the end of 2024, we could be looking for opportunities to add some European equities to our portfolios.

Let’s explore different scenarios:

Scenario # 1 | Hung parliament

We think the hung parliament outcome is currently well reflected in market prices. The further widening potential of the French-German bond spread would hence be limited and potentially short-lived as we don’t expect severe funding stresses or a contagion to other countries. Our research suggests that the euro would likely find support above USD1.05-1.06/EURbefore interest rates and economic growth differentials start driving the currency again. We maintain our view that the euro could appreciate modestly vs the dollar when the US Federal Reserve starts cutting rates (September is possible, or perhaps towards year-end). If the European economy continues to recover gradually as we think, bolstered mainly by services activity, and other economies across the globe hold steady, this could also support the euroIn this scenario, the CAC 40 will likely rise once political uncertainty clears 

Scenario #2 | Right-wing (or left-wing) absolute majority

Scenarios where the RN or the NPF win an absolute majority, however, have the potential to send the French markets lower in the near term, and the euro too. Essentially, they could result in larger fiscal spending plans, which aren’t currently priced in. However, we think that, over the medium term, economic growth and monetary policy will drive the markets much more than political developments. Plus, even an outright majority for RN or the NPF would have to raise funds in the markets, which is likely to limit the extent of any spending plan (though perhaps after more marked volatility). In any case, we don’t expect the ECB to buy French government bonds if they were to sell off because of significant fiscal slippages caused by unfunded spending plans, as it didn’t do it when Italy faced a similar situation. Obviously, if this was to threaten European financial stability (not our base case), the ECB would likely step in and buy European government bonds, potentially including support for France if its fiscal policy turned more mainstream. 

How we’re positioned in flagship portfolios 

Our asset allocation reflects the improving economic outlook (which you can read about in our Mid-Year Outlook), but we’ve also designed it to mitigate lingering risks, including geopolitics and elections. At the start of the year, we started moderating our preference for bonds over equities due to the removal of major equity headwinds, such as interest rate increases. Subsequently, we have added to high-quality bonds and gradually increased our exposure to equities as inflation moderated.  

We also maintain our diversified allocation across marketsA fragmented world along geopolitical lines, which could create volatility, remains one of our core theses. As such, at the beginning of the year, we added several diversifiers into our flagship portfolios. Broad commodities typically protect against bouts of geopolitical uncertainty, when for instance oil prices spike. We also added an equity insurance instrument and in portfolios where client knowledge and experience, and regulations, permit. Such an instrument protects against possible drawdowns in equity markets, which we have seen over the past two weeks when European stocks fell in the wake of the results of the European and French elections.  

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Nora Lemhachheche

Nora Lemhachheche
Market Head France, Belgium, Netherlands and Luxembourg

+352 621 189 723

Emmanuel Savary de Beauregard

Savary de Beauregard
Manager of French Market

+352 621 289 310

Philippe Torres

Philippe Torres
Client Advisor

+352 621 289 304

Maxime Vialettes

Maxime Vialettes
Client Advisor

+352 621 185 509

Pierre-Emmanuel Couraud


Client Advisor

+352 621 176 610

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