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In May, rating agency S&P Global downgraded French government bonds and effectively told the country’s politicians: get your act together.
“Political fragmentation adds to uncertainty about the government’s ability to continue implementing policies that increase potential economic growth and address budget imbalances,” she said in a note accompanying her decision to downgrade the country by one notch to AA -, still a sign of quality, but a drop nonetheless.
That was on May 31, before European parliamentary elections set off a chain reaction of national votes that ended on Sunday with a hung parliament. The far right did well, but not well enough to withstand a surge in support for a group of centrists, communists and greens who worked together and rallied behind the cause of keeping Marine Le Pen’s National Assembly off the prime minister’s table.
What follows will be a protracted period of wrangling, posturing and tough claims by rival politicians to provide France’s only true voice. In other words, in terms of markets: plus what a difference.
At a conference on Monday, Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management in Paris, said on the plus side, the mixed vote result meant “there won’t be a Liz Truss moment” of fireworks. in the bond market. from a strong change in fiscal policy. But, he added, “I don’t see a solution to the medium and long-term problems facing France.” The country should prepare for one or two more downgrades from rating agencies, he added, and more parliamentary elections in a year or so.
Politically, everything has changed in France. Economically, the things investors really care about, not so much. That’s why so far (and it’s worth remembering that these are early days, a lot can go right or wrong from here) we’ve only seen temporary dips in the euro, French stocks and government bonds country.
In fact, gridlock, bickering and posturing, while they may be bad for democracy, are in many ways exactly what investors want to see continue. They had been nervous about the prospect of a far-right government. Although the RN had promised to play nice with the markets, the prospect of the party spending years fighting with the EU over budgets posed the risk of France becoming the new Italy, which has historically been vulnerable to bond market swings. In a worst-case scenario, the RN could revive its love of Frexit.
But they had also been nervous about the possibility that the far left would also emerge victorious. In fact, they still are. As UBS Global Wealth Management chief investment officer Mark Haefele noted on Monday, one option for President Emmanuel Macron now is to appoint a prime minister from the party that won the most seats, in this case the left-wing Nouveau Front Populaire.
“An NFP government would likely try to undo recent pension and unemployment reforms, raise the minimum wage and not engage in fiscal consolidation, in our view,” Haefele and his team wrote on Monday. “We believe that the NFP program, if implemented as proposed, could lead to a significant worsening of the already high budget deficit.” This is not a great result for French government borrowing costs, which is not a great result for corporate France. In turn, this is why for many, an ineffectively hung parliament is the best of a series of unpleasant options.
All this drama will hang not only over France, but all of Europe for some time. “It is possible that the asset allocations of [French equities] will be reduced forever,” said Frederic Leroux, a member of the strategic investment committee at French investment house Carmignac.
In addition, all of this provides another perverse reason for global investors outside of Europe to give the continent a wide reach. “The problem is the perception outside of Europe of Europe,” said Nicolas Faller, co-chief executive for asset management at Swiss wealth manager UBP. “Every year we have a good reason not to invest in Europe,” he said. There’s always something popping up to pique the interest of customers in Asia, for example. Why bother trying to understand the complexities of Europe when the US moves fast, breaks things and delivers strong market returns?
Overall, this result is a surprise. Opinion polls had indicated a far-right majority that failed to materialize. This is a useful reminder not to rely too heavily on opinion polls ahead of the US election, which will be viewed poorly later this year. But as analysts at Rabobank said in a note: “This is surprising in style more than in substance . . . The result is the same, in that we are now likely to see a period of policy paralysis.” Plus what a difference really.