Goldman Sachs strategists said French stocks could be further hit by political risks in the coming weeks and months, but the impact would be concentrated in certain areas.
Blue-chip stocks in Paris’ CAC 40 index posted their worst performance since March 2022 last week, plunging more than 6% as they were rocked by the surprise announcement of snap elections.
The prospect of the far-right National Rally winning the legislative elections on June 30 and July 7, as well as the possibility of populist fiscal policies, measures targeting banks and a “Liz Truss-style financial crisis”, immediately put markets on edge. Shocked.
The spread between French and German 10-year bond yields widened 25 basis points as stocks sold off and borrowing costs climbed.
Goldman Sachs strategists expect this spread to continue to widen in the coming weeks.
“This is likely to maintain pressure on French domestic equities, especially bank stocks that are highly sensitive to sovereign spreads,” Goldman Sachs strategists said in a research note released on Friday.
Big domestic brands in France include supermarket chains Carrefourconstruction company finch and utility Enjiwhile its internationally oriented giants include LVMH, L’Oreal and Rémy Cointreau.
In the short term, Goldman Sachs recommends focusing on defensive sectors such as health care amid heightened political uncertainty.
The investment bank said a national rally victory could further weaken French domestic stocks but could be more business-friendly than expected in the long term if the party continues to focus on ensuring its candidate wins the 2027 presidential election.
It added that there was also the possibility of a hung parliament and political deadlock, which would “reduce the likelihood of a sharp market reaction” but would be consistent with broader sovereign spreads, resulting in sustained losses for specific exposed domestic equities.
CAC 40 exposure
Sharon Bell, senior equity strategist at Goldman Sachs, said the CAC 40 index as a whole has only about 20% exposure to France.
“Right now, France’s exposure is not zero, and people are clearly adding an additional risk premium to France given the upcoming election,” Bell told CNBC’s “Squawk Box Europe” on Monday.
She added: “This market has also performed well in recent years, with some companies trading at quite high valuations… 80% of which are companies based outside France, many of which are dollar earners.”
“I do think it’s a bit of a knee-jerk reaction to sell all French stocks, and we think the most vulnerable are small caps and French domestic stocks.”
From a broader perspective, Europe’s heightened awareness of political risk has contributed to the valuation gap between the region and the United States, she added.
“When I talk to global clients (Asian clients, US clients) about investing in Europe, one of the first things that comes to mind is political risk…I definitely don’t think the gap between Europe and the US is going to close, and our perspective may be It’s smaller, but it’s not going to close because of some of those risks,” Bell said.
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