French Stocks Brace for Increased Political Risk, Warn Goldman Strategists

French stocks are expected to face more pressure from political risks in the coming weeks and months, with certain areas being particularly affected, according to strategists at Goldman Sachs.

Recent Market Performance Blue-chip stocks on Paris’s CAC 40 index recently experienced their worst performance since March 2022, plummeting more than 6%. This sharp decline was triggered by the unexpected announcement of a snap election, which caused immediate market anxiety over a potential victory for the far-right National Rally. Concerns centered around the possibility of populist fiscal policies, measures targeting banks, and a scenario reminiscent of the “Liz Truss-style financial crisis.”

Market Reaction and Future Outlook In addition to the equity sell-off, borrowing costs rose, and the spread between French and German 10-year bond yields widened by 25 basis points. Goldman strategists predict that this spread will likely remain elevated in the near future, maintaining pressure on French domestic stocks, especially banks, which are highly sensitive to sovereign spreads.

Strategic Advice Goldman Sachs advises investors to focus on defensive sectors like healthcare amid the current political uncertainty. The firm notes that major French domestic stocks, including Carrefour (a supermarket chain), Vinci (a construction firm), and Engie (a utility company), are more vulnerable to political risk. In contrast, internationally oriented French giants like LVMH, L’Oreal, and Remy Cointreau have a broader exposure that might buffer them from domestic political turmoil.

Potential Political Scenarios Goldman Sachs outlines several potential political outcomes:

1. A National Rally win could further depress French domestic stocks but might eventually lead to a more business-friendly environment if the party prioritizes a candidate victory in the 2027 presidential election.
2. A hung parliament could lead to political deadlock, reducing the likelihood of a drastic market reaction but still contributing to wider sovereign spreads, impacting specific domestic stocks.

CAC 40 Exposure The CAC 40 index, as a whole, has about 20% exposure to French markets. Sharon Bell, Goldman’s senior equity strategist, points out that while this exposure is significant, it also means 80% of the index is tied to international markets, with many companies being dollar earners. Bell suggests that the recent sell-off of all French stocks might be an overreaction, and that the most vulnerable stocks are likely smaller caps and domestically focused companies.

Broader Market Implications Bell adds that the heightened perception of political risk in Europe contributes to the valuation gap between European and U.S. markets. Despite this gap potentially narrowing, it is unlikely to close entirely due to ongoing political uncertainties.

Investors are advised to monitor political developments closely and consider diversifying their portfolios to mitigate risks associated with French domestic stocks.