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 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:
Go Long :
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 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:
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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