Content navigation
*Melonomics refers to Giorgia Meloni the right wing Italian Prime Minster, who has moderated her party’s policies to be more market friendly. Trussnomics refers to the UK Prime Minister’s Liz Truss’s ‘mini budget’ that led to negative reaction from the British pound, the gilt and UK equity markets.
Political apathy, slow decision making, and a more moderate approach likely – market fears could be overdone, presenting an opportunity for investors.
The aftermath of the first voting round of the French parliamentary elections confirmed that the radical right party Rassemblement National (RN) is in the lead, with 33.2% of the votes and the far-left alliance New Popular Front is second with 28% of the votes. Whilst President Macron’s moderate coalition ensemble came in third with 20.8% of the votes, this was a result that the polls were broadly predicting.
The market has reacted positively to what seems to be a less strong lead by the RN party, which reduces the risk of an outright absolute majority following the second round of voting. The French two-rounds system to elect 577 seats makes it difficult to predict an outcome with a high degree of certainty at this stage, but if we end up with the RN having a weak majority, or a split assembly, we will end up with a weak government position. A cohabitation period, as flagged in our report last week, with the RN party nominating the prime minister will lead to political paralysis in France in our view, or weak political decision making.
-
It is in our view more likely that a French government led by the RN party will be more like Georgia Meloni’s government in Italy, in becoming more moderate and more measured in its policies. Therefore, it will be more market-friendly, than the short-lived Truss government in the UK which showed a disregard for fiscal prudence.
A week of political jockeying ahead of the second round of voting, may reduce the chances of an outright RN party majority
Ahead of the second round of voting on the 7th July, this week will be one of political jockeying between the parties, and likely Macron seeking some alliances to form some working coalition. This could be the period during which Macron’s party will be working on a Machiavellian outcome that could move his surprise snap elections action from being a reckless risk (tête brûlée1), to becoming a calculated demand to the French electorate for more support, and more political unity, by calling for the solidarity vote against extremist parties. See our report entitled “Machiavellian or Tête Brûlée” for details.
Already, it appears that, as we write, 221 candidates have dropped out of the second round, in order to avoid a tri-partite candidate dynamic, and to increase the chances of a non-RN party candidate winning a seat. Of these 221 candidates who have dropped off, 125 are from the far-left alliance, and 81 from Macron’s moderate alliance. Both coalitions are calling on their voters to vote in a way to avoid giving the far-right a stronger share of the voice in parliament.
An RN party victory would likely lead to a less aggressive rhetoric once in government
The market has been concerned about the potential for fiscal expansion, and widening government deficit, as well as anti-EU integration measures, should the RN party take control of the French National Assembly.
We do however highlight that the European political institutions do require that each national budget plans get approved by the European Commission, to ensure that each member state of the EU stays within an EU imposed and ratified budget deficit limit of 3% of Gross Domestic Product (GDP). Each member country needs to stick to the EU fiscal framework. If a country overshoots the budget deficit target, it is put under the Excessive Deficit Procedure (EDP), which imposes a 0.5% points reduction in deficit annually, until the deficit is brought back in range. France is already under that EDP list, given that the 2023 deficit was already larger than 3% of GDP.
As such, the room for maneuver around any fiscal excesses would also be limited, in our view, unless the RN party disregards the EU fiscal deficit constrains. Our conclusion would be that any unusual spike in French bond yields, and sell-off in the French equity market, would present an opportunity for investors.
In addition, it seems that the RN party is conscious that, should it be in a position of leadership in the parliament, it would be closely watched for credibility. The short-lived 2022 Liz Truss government in the UK, triggering a gilt market crisis, is a reminder to the RN party in France that irrational and fiscally over-expansive policies will be met by significant negative market reactions in the sovereign debt market.
As RN MP Jean-Philippe Tanguy is quoted as saying in the Financial Times on 17th June 2024: “The RN will hold the line on deficits and present a credible plan. The markets will be severely on us, so we really have no choice but to do so.” It seems that the RN party is conscious that French voters will be assessing whether a RN party in power is a plausible option over the next three years, in the run up to the Presidential elections of 2027.
RN party could shift to Melonomics, rather than Trussonomics
It is in our view more likely that a French government led by the RN party will be more like Georgia Meloni’s government in Italy, in becoming more moderate and more measured in its policies. Therefore, it will be more market-friendly, than the short-lived Truss government in the UK which showed a disregard for fiscal prudence which led to a sanguine reaction in both the UK bond and equity markets at the time. We also believe that the ‘Frexit’ rhetoric that might have been flagged in the past would likely all but disappear, as the RN party aims to show that it has a credible political future in order to avoid an EU-crisis.
This will likely lead to political apathy
In any of the scenarios faced, we do not believe that France will deviate from its budget constraints vis-a-vis the EU. We reiterate that market fears of unorthodox policies and fiscal expansion are overdone, creating a buying opportunity in French equities, given the sell-off ahead of this increased political uncertainty with one of the key EU member states.
Weakness in French markets is overdone, and could present an opportunity
Sectors that have sold off the most, notably banks, utilities and infrastructure stocks, typically get seen as more sensitive to sovereign spreads and will likely be more prone to recover. At the same time, investors should note that French corporates in the CAC40 Index have a significant portion of revenues generated from outside France, and outside Europe, being generally large multinational companies. This therefore highlights that the sell-off, on the back of French sovereign risk, might be a buying opportunity for names quoted on the French market, but less exposed to France specifically.
Presidential elections in 2027 will be the real crunch point for France
The French parliamentary elections do shine more light on the potential political risks to take into account in the run up to the French Presidential elections of 2027, should the RN party continue to gather strong electoral support, and should Macron not have a charismatic candidate to take over from him by then.
Sources
1Tête brûlée is a French term that technically translates into “burnt head”, but is typically used to describe a person who voluntarily takes reckless and inconsiderate risks, in a kamikaze manner.
Important Information
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
The views expressed are opinions of the named manager as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.
For wholesale investors in Australia:
This material is provided on the basis that you are a wholesale client. MCIM has entered an Intermediary arrangement with Franklin Templeton Australia Limited (ABN 76 004 835 849) (AFSL No. 240827) (FTAL) to facilitate the provision of financial services by MCIM to wholesale investors in Australia. Franklin Templeton Australia Limited is part of Franklin Resources, Inc., and holds an Australian Financial Services Licence (AFSL No. AFSL240827) issued pursuant to the Corporations Act 2001.
For professional investors in Canada.
This material is intended for residents in, or incorporated in, Canada and are a Permitted Client for the purposes of MI 31-103. The information on this section of the website is not intended for use by any other person, including members of the public.
Martin Currie Inc, incorporated in New York with its registered office at 280 Park Avenue, New York, NY 10017 and having a UK branch registered in Scotland (no SF000300), Head office, 5 Morrison Street, 2nd floor, Edinburgh, EH3 8BH, Tel: +44 (0) 131 229 5252 Fax: +44 (0) 131 222 2532 www.martincurrie.com, operates under the International Adviser Exemption with the Ontario Securities Commission (‘OSC’) and is therefore currently not required to be registered as a portfolio manager for the purposes of MI 31-103. Martin Currie Inc. is also authorised by the UK Financial Conduct Authority.
For the avoidance of doubt, nothing excludes, limits or restricts our obligations to you under the UK Financial Services and Market Act 2000, National Instruments or any other applicable law or regulation.
The opinions and views in this website do not take into account your individual circumstances, objectives, or needs and are not intended to be recommendations of particular financial instruments or strategies to you.
This website does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. You should consult with your professional advisers before undertaking any investment activity. The information provided on this website should not be treated as advice or a recommendation to buy or sell any particular security or other investment. The information on this website has not been reviewed by any competent regulatory authority.
For professional investors:
In the People’s Republic of China:
This document does not constitute a public offer of the strategy, whether by sale or subscription, in the People’s Republic of China (the “PRC”). These strategies are not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC.
Further, no legal or natural persons of the PRC may directly or indirectly purchase any of the strategy or any beneficial interest therein without obtaining all prior PRC’s governmental approvals that are required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions.
In Hong Kong:
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
In South Korea:
This document is for information purposes only. It is prepared and presented to provide an introduction to the business of MCIM and its related companies (collectively known as ‘Martin Currie’). This document does not constitute an offer to sell or a solicitation of any offer to invest in any security, fund or other vehicle managed or advised by Martin Currie.
None of the security(ies), fund(s) or vehicle(s) managed by or advised by Martin Currie are registered in South Korea under the Financial Investment Services and Capital Markets Act of Korea and accordingly, none of these instruments nor any interest therein may be offered, sold or delivered, or offered or sold to any person for re-offering or resale, directly or indirectly, in South Korea or to any resident of South Korea except pursuant to applicable laws and regulations of South Korea.
Martin Currie is not registered with or regulated by any regulatory authorities in South Korea.