Goldman Sachs strategists say French stocks are likely to be hit further by political risks in the coming weeks and months, but the impact will be concentrated in certain areas. Blue-chip stocks on Paris’ CAC 40 index posted their worst performance since March 2022 last week, falling more than 6% as the country reeled from the sudden announcement of new elections. The market was quickly spooked by the prospect of the far-right party Lassemblement National winning the general elections on June 30 and July 7, as well as populist monetary policies, anti-bank measures and the possibility of a “Liz Truss-style financial crisis.
” In addition to the decline in stocks, borrowing costs also rose, widening the gap between French and German 10-year bond yields by 25 basis points. Goldman strategists expect the spread to remain elevated in the coming weeks. “This is likely to continue to pressure French domestic equities, particularly banks, which are highly sensitive to government bond spreads,” Goldman strategists wrote in a research note on Friday. The Carrefour supermarket chain is one of the leading French companies, construction company Vinci, energy supplier Engie and Meanwhile, among the internationally-minded giants are companies like LVMH, L’Oreal and Rémy Cointreau Count.
In the short term, Goldman advises betting on defensive sectors such as health care amid rising political uncertainty. The investment bank said a victory for the National Lassemblements would likely deal a further blow to French stocks, but that the party could prove more pro-business than expected in the long term if it remains focused on securing victory in the 2027 presidential election. He added that a parliament without a clear majority and political stalemate is also possible, which would “make it less likely that markets will react sharply” but would be accompanied by wider government bond spreads and continue to weigh on certain domestic stocks. Exposure. Tackling the CAC 40 The CAC 40 as a whole only has about 20% exposure to France, according to Sharon Bell, senior equity strategist at Goldman. “That doesn’t mean we have zero exposure to France, and there is clearly an additional risk premium now on France with the election coming up,” Bell said on CNBC’s “Squawk Box Europe” on Monday. “This market has also performed well in recent years and some companies are very highly valued… 80% of them are based outside France and many of them earn dollars,” she added. “I think it was a natural reaction to sell all French stocks. We would argue that small caps and French companies are the most vulnerable.”
More broadly, he added, a growing perception of political risk in Europe is contributing to the region’s valuation gap with the U.S. “When I talk to global clients, whether it’s Asian clients or U.S. clients, about investing in Europe, the first thing that comes up is political risk. I’m a big believer in this widening gulf between Europe and the U.S. that’s never going to close. It might narrow a little bit, that’s our view, but it’s not going to close because there are some risks,” Bell said.
