French Equities Volatility Seen Lasting After Vote

By Albertina Torsoli, Bloomberg Taking Stock author and analyst

Volatility in French stocks may just be getting started even though President Emmanuel Macron secured a safe spot in the election runoff alongside nationalist leader Marine Le Pen.

While the results of the first round vote may be reassuring for the pro-business incumbent, there’s still lots for investors to worry about. Le Pen still has a real chance after being defeated last time, a scenario that could be a drag on French equities, which outperformed under Macron.

Le Pen’s program is “everything but Europe,” says Philippe Waechter, chief economist Ostrum Asset Management. A victory for her would raise the question of what France’s role would be with regards to negotiations with Russia. “We could be entering a terrible zone of turbulence.”

In the short-term though, relief could still bolster shares in various sectors, including banks like Societe Generale and BNP Paribas. They are seen benefiting from Macron’s push for European Union integration amid a renaissance for Paris as a financial hub for firms looking to grow on the continent post Brexit.

Luxury is another sector that may benefit from the higher chance of a Macron re-election, having accounted for about 45% of the CAC’s total gain since he was elected in 2017. Toll-road operators Vinci and Eiffage could be boosted too after suffering last week as investors digested the possibility of victory for a candidate in Le Pen who has pledged to re-nationalize the country’s highways.

Still, while Macron’s chances look good, “there is still plenty of uncertainty for the second round and we can expect a lot of noise” to keep markets nervous in the next two weeks as the campaign intensifies, says Emmanuel Cau, head of European equity strategy at Barclays.

And even if Macron wins, volatility could last well into parliamentary elections scheduled for June as any president will have trouble governing with no majority, according to Xavier Chapard, a strategist at La Banque Postale Asset Management.

The CAC 40 fell 2% last week versus the Stoxx 600’s 0.6% gain amid jitters over Macron’s re-election prospects. Still, it has outperformed most other major Western European benchmarks in the past five years and there are both economic and valuation reasons to stay upbeat.

France’s economy recovered faster from the pandemic than major euro-area peers, according to Bloomberg Economics. And for French stock bulls, the CAC 40 has also become cheaper. Its 12-month forward P/E ratio of ~12.1 is just off the lowest levels since March 2020 and well below 2017 election levels.

The first round result is also likely to reassure on the prospects of companies in which the French government has stakes, such as EDF, Renault or Airbus, as a new leader would mean new governance. EDF’s nationalization has been discussed in the past month.