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An Equity Investor’s Guide to France’s Parliamentary Election

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·4 min read
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(Bloomberg) --

Most Read from Bloomberg

France’s CAC 40 Index fell into a bear market this week amid a global equity rout triggered by concern that a recession is looming. Investors in French stocks have one more thing to worry about this weekend.

Should President Emmanuel Macron fail to win an outright majority of the seats in the National Assembly in Sunday’s election, he would need support from the center right to push ahead with his agenda, which includes raising the retirement age and restructuring electric utility EDF.

That might make investors, who have backed Macron’s pro-business, pro-European Union policies, less bullish on French stocks. By contrast, banks such as Societe Generale SA and luxury companies including LVMH would get a boost should he secure another five years of legislative control.

Polls indicate Macron’s party and its allies will win the most seats, but may fail to get the 289 needed for an absolute majority. The main opposition, a left-wing coalition known as Nupes, is unlikely to take control of the assembly, surveys indicate. A surprise win would shock investors, since those parties are calling for big increases in government spending and taxes, price freezes and state takeovers of some businesses.

“The most likely outcome is a relative majority for Macron, which would make governing harder but wouldn’t be a drama,” says Philippe Waechter, chief economist at Ostrum Asset Management. “Any surprise victory by the far-left alliance would make investors run.”

French Left Wants Economic Revolution in Parliament Election

To be sure, investors are more focused on inflation and the economy than the election, said Serge Pizem, head of multi-assets at Axa Investment Managers in Paris. A substantial win by Nupes would “indeed be a wave, but a smaller one versus the giant wave that’s currently roiling markets,” he said.

Below is a sector-by-sector rundown:

Banks

Lenders such as BNP Paribas SA, Societe Generale and Credit Agricole SA would benefit from a Macron majority, since it would imply stability in France’s finances and the continued attraction of foreign investors. Nupes, which includes Jean-Luc Melenchon’s far-left France Unbowed and the center-left Socialist Party, wants to separate investment banking from retail banking, prohibit “toxic” derivatives and implement a “significant” tax on financial transactions.

Luxury

Luxury is France’s powerhouse industry, and Macron’s first term was good for business, with lower taxes for the rich. LVMH, Gucci owner Kering SA and Hermes International accounted for all of the CAC 40’s net gain since his 2017 election. His party holding a grip in parliament would mean a continued favorable business and tax environment. Melenchon’s alliance would increase taxes on the wealthy.

Energy

Macron’s government has been considering a nationalization of the troubled utility Electricite de France SA and big investments in nuclear power, while also providing continued support to households struggling with soaring electric and gas prices. Nupes wants an exit from nuclear and would go beyond the nationalization of EDF, combining the electric distribution system and other energy players into a state-run entity.

Grocers, Other Retailers

Investors have been expecting consolidation to finally happen among French food retailers following the re-election of Macron in April after the government stopped Canadian convenience-store operator Alimentation Couche-Tard Inc. from acquiring grocer Carrefour SA. Macron also has pledged to introduce so-called food vouchers to help less affluent citizens suffering from inflation, which analysts say would benefit both Carrefour and Casino Guichard-Perrachon SA. Melenchon’s alliance is proposing price freezes on some goods, which could trigger a sell-off in grocery stocks, said Clement Genelot of Bryan Garnier & Co.

FRANCE PREVIEW: Divided Parliament Could Add to Fiscal Risks

The black swan event would be an outright majority for Nupes. There’s a 15% chance of that happening, said John Plassard, a director at Mirabaud & Cie.

That would cause the CAC 40 Index to slump 20% to 30% in just a few days, said IG France chief market analyst Alexandre Baradez. “It would be very violent,” he said. The Nupes program is “an absolute repellent for foreign and domestic investors alike.”

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