French shares are likely to take a further hit from political risks in the coming weeks and months, but the impact will be concentrated in certain areas, according to Goldman Sachs strategists.
Blue chips on Paris’ CAC 40 index tumbled more than 6% last week, their worst performance since March 2022, as the country was rocked by the sudden announcement of a general election.
Markets were immediately spooked by the prospect of the far-right National Coalition party winning the parliamentary elections on 30 June and 7 July, along with populist fiscal policies, measures targeting banks and the possibility of a “Liz Truss-style financial crisis”.
The sell-off in stocks has driven up borrowing costs, pushing the gap between French and German 10-year bond yields up by 25 basis points.
Goldman strategists expect the spread to remain wide in the coming weeks.
“This is likely to keep pressure on French domestic equities, particularly banking stocks, which are highly sensitive to government bond spreads,” Goldman strategists said in a research note on Friday.
Major French companies include supermarket chain Carrefour, construction company Vinci and utilities company Engie, while large international companies include LVMH, L’Oreal and Rémy Cointreau.
In the near term, Goldman advises investors to look to defensive sectors such as healthcare amid heightened political uncertainty.
The investment bank said a National Rally victory would likely see French stock prices fall further, but in the longer term the party could prove more business-friendly than expected if it remains focused on securing victory for its candidate in the 2027 presidential election.
He added that there was also the possibility of political gridlock with Congress in limbo, which would “reduce the likelihood of a sharp market reaction” but would be consistent with wider Treasury spreads and continue to hurt certain domestic stocks.
The CAC 40’s overall exposure to France is only about 20%, according to Sharon Bell, senior equity strategist at Goldman.
“We don’t have zero exposure to France, but there is clearly a heightened risk premium on France at the moment with the upcoming election in mind,” Bell said Monday on CNBC’s “Squawk Box Europe.”
“The market has been doing well in recent years and some companies are very highly valued. 80% of them are based outside France and many of them are dollar-earning companies,” she added.
“I think it was a bit of a knee-jerk reaction to sell all of the French stocks. We would argue that it’s the small caps and the French domestic stocks that are most vulnerable.”
More broadly, a growing perception of political risk in Europe is contributing to the rating gap between the region and the United States, she added.
“When we talk to clients around the world, whether they’re in Asia or the U.S., about investing in Europe, the first thing they talk about is political risk,” Bell said. “I don’t think the gap between Europe and the U.S. will ever close. Our view is that it might close a little bit, but it won’t close because of these risks.”
