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In May, ratings agency S&P Global downgraded French government bonds, effectively telling the country’s politicians: get your act together.
“Political fragmentation contributes to uncertainty about the government’s ability to continue implementing policies that increase the potential for economic growth and address fiscal imbalances,” she said in a note accompanying her decision to cut the country’s rating by one notch to AA-, which is still a mark. quality, but still a downgrade.
That was on May 31 when European Parliament elections set off a chain reaction of national votes that ended with a hung parliament on Sunday. The far right was doing well, but not well enough to counter the wave of support for a bunch of centrists, communists and greens who worked together and rallied behind the cause of keeping Marine Le Pen’s Rassemblement National off the prime minister’s desk.
What will come next will be a long period of arguments, posturing and full of demands by rival politicians to offer the one true voice of France. In other words, when it comes to markets: plus ça change.
On the other hand, Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management in Paris, said at a briefing on Monday that the mixed vote result meant “there will not be a Liz Truss moment” that set off fireworks in the bond market. by a sharp shift in fiscal policy. But he added: “I don’t see a solution to the medium to long-term problems facing France.” The country should prepare for one or two more ratings agency downgrades, he added, and another parliamentary election in about a year.
Politically, everything has changed in France. Economically, the things that investors really care about, not so much. That’s why so far (and it’s worth remembering that it’s early days, a lot can go wrong or go wrong from here) we’ve only seen fleeting dips in the euro, French stocks and the country’s sovereign bonds.
In fact, stagnation, bickering and posturing, while arguably bad for democracy, are in many ways exactly what investors want to see continue. They were nervous about the possibility of an ultra-right government. While the RN has promised to play nice with the markets, the prospect of the party fighting with the EU over budgets for years posed a risk that France could become the new Italy, which has historically been vulnerable to bond market volatility. At worst, the RN could renew its fondness for Frexit.
But they were also nervous about the prospect of the far left winning as well. In fact, they still are. As UBS Global Wealth Management chief investment officer Mark Haefele pointed out on Monday, one option for President Emmanuel Macron now is to appoint a prime minister from the party that won the most seats, in this case the hard-left Nouveau Front Populaire.
“In our view, an NFP government would likely try to undo recent pension and unemployment reforms, raise the minimum wage and not engage in fiscal consolidation,” Haefele and his team wrote on Monday. “We believe that the NFP program, if implemented as proposed, can lead to a significant worsening of the already high budget deficit.” That’s not a great outcome for the French government’s borrowing costs, which isn’t a great outcome for corporate France. This, in turn, is why, for many, an inefficient hung parliament is the best of a number of unsavory options.
This whole drama will hang not only over France but over all of Europe for some time to come. “It is possible that asset allocation to [French equities] will be permanently reduced,” said Frederic Leroux, a member of the strategic investment committee of the French investment house Carmignac.
Moreover, it all provides another chaotic reason for global investors outside of Europe to give the continent a wide berth. “The problem is the perception of Europe outside of Europe,” said Nicolas Faller, co-chief executive of asset management at Swiss wealth manager UBP. “Every year we have a good reason not to invest in Europe,” he said. Something always comes up to dull the interest of clients in Asia, for example. Why bother putting effort into understanding the complexities of Europe when the US is moving fast, breaking things and delivering strong market returns?
Overall, this result is a surprise. Public opinion polls showed a far-right majority, which did not materialize. This is a useful reminder not to rely too much on opinion polls ahead of the US election looming ominously later this year. But as analysts at Rabobank said in a note: “It’s a surprise in style rather than substance . . . The result is the same in that we are now probably looking at a period of political paralysis. Plus really a change.