French new government/ economic choices LIVE

After the far-right victory to European elections on June 09, President Macron announced a general election in the country on June 30 & July 07- triggering a shockwave on European equity markets.
But for the macro side, most brokers will not be reporting about it, unlike AlphaValue. Our independence allows us to speak in detail about the ongoing elections and cover its impact on stocks.
Join this space to get a daily LIVE coverage of French stocks for the 3-week period as we get closer to the elections and the aftermath of it.

Read for an update with a macro-economic view of the current situation (dated-08 July 2024)

The surprising outcome of the French snap elections is that the far-right lost them in the second round. Expected to be the largest party and likely to be given the prime minister position, the far right ends up third even lagging the supposedly collapsed center-right Macron party. The good news is that France will be driven by a democratic coalition. The sad news is that a coalition will be found only after weeks of horse trading and will have to shift left, spend more and presumably tax more. Markets may not like the near term uncertainty/volatility but the worse, far right incompetence at the helm, is avoided. Markets knew that a coalition was a likely outcome. The only unknown is whether its likely profile (left of centre) is priced in the 70-80bp spreads of Friday 05-07-2024

France political position at risk: from bad to worse is a likely outcome
Even though the country is in a 5.5% deficit, every French politician and their dog promises to spend more, making the goal to bring it down to 3% by 2027 a far reach. With a coalition government with a left-leaning tweak, France might be a zombie for the next two years exerting a downward pressure on EC GDP growth. 

Markets are holding France by its neck

A hung Lower House will impeach any reform- a decision that would not bode well for the French sovereign debt dynamic, as even under IMF's politically correct assumptions – growth, inflation, debt servicing and primary deficit – projections barely allow for the stabilization of the debt level as a % of GDP.
Even moving slightly with these assumptions lead to much less rosy scenarii.
The Mild 70's scenario below (the black line below, 0.8% GDP growth, 2.5% inflation, contained deficit) only implies a little less growth and still close to potential, far from a cataclysmic scenario, with a bit more inflation, and a primary deficit in line with the last 20 years.





But the question remains if France still belongs to the so called « core » of the Eurozone? From its size and importance for the EU construction process, without doubt. But relative to the EMU fiscal rules, certainly not anymore. France is closer to Italy now than to the Netherlands. Furthermore, the French spread with Germany is now close to the Spanish one, and rightly so. Thanks to a number of countries, mostly located in the bottom right quadrant of the following plot chart, the average EMU debt level and fiscal balance stands at 89% and -3,1% of GDP respectively, reducing the contagion risk in spreads.

But should France enter a recession, there will be no immunity.
Growth in Europe as a whole, will be impacted, not only directly, in accounting terms, but also in terms of the demand addressed to the other countries, with potential negative knock-on effects, all the more as growth is currently already weak in the region.
 
To conclude,
a.  In terms of carry, in an IMF-type muddle-through scenario, prefer Spain, the Baltics or Cyprus, which offer a better spread given the country's macro-financial situation
b.  In the event of a recession- soft, hard, mild 70's; the spread with Germany could very well widen via a Bund rally, at least initially - from a capital gains/ portfolio hedging point of view; prefer the Bund, or the Netherlands (the bottom-right quadrant of the chart)
c.  To assess the impact on equities, we can simulate the sectoral impact of a 1.5% contraction in GDP over 2 years. And, a Eurozone probably at -0.7%, given current overall health, a "reasonable" assumption.

In the event of a recession, the ECB would cut rates, but probably only marginally and slowly, as inflation is still above target. Such a move would also hit the Euro, channelling more inflation into the EMU. In any case, a rate cut would benefit the Bund, the Netherlands' sovereign bonds, the Irish ones, etc. The ECB would intervene directly on the interest rate markets probably only if the spread were to be caused by a rise in French yields.
 


(Macro information credits to Sarim & AlphaSwing)

The sectors to look at:

Banks
Navigating the political mayhem
Telecoms
French Telcos, another victim of extremes?
Orange & Bouygues in the turmoil of dissolution?
Defence
Are the stocks still worth the hassle?
Infra
Far-right hit to Infra
Luxury
French or Luxury
Family Business
French Family businesses have no taste for political extremes


Go Long :

Stock name

AlphaValue comments

Hermès
Limited exposure to France, business model, Balance sheet
Legrand
Limited exposure to France, business model, Balance sheet
Sanofi
Limited exposure to France, business model, Balance sheet
L’Oréal
Limited exposure to France, business model, Balance sheet
CapGemini
Limited exposure to France, business model, Balance sheet
LVMH
Limited exposure to France, business model, Balance sheet
EdenRed
Limited exposure to France, business model, Balance sheet
STM
Limited exposure to France, business model, Balance sheet
Dassault Syst.
Limited exposure to France, business model, Balance sheet
Virbac
Limited exposure to France, business model, Balance sheet
Bureau Veritas
Limited exposure to France, business model, Balance sheet
Airbus
Limited exposure to France, business model, Balance sheet


Go Short:


Stock name

AlphaValue comments

SocGén Market proxy
BNP
Market proxy
CASA
Market proxy
AXA
Market proxy
Amundi
Market proxy squared
Vinci
Superb business marred by the French politics
Eiffage
Concessions marred by French politics
ACS
French concessions via Abertis


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