Uncertainty reigns in France. A loose coalition of left-wing and green parties has won the most seats in the second round of the French legislative election, while a coalition of candidates across the centre and left withdrew to ensure the far-right Rassemblement National (RN) was pushed into third.
There is no agreement on who the prime minister should be, and little confidence that these coalitions can function effectively. The second round decisively showed what many French people don’t want but gave few clues as to what they do.
The market reaction has been muted, with the euro, French stocks, and bonds all close to flat in early trading. This is unsurprising since there was no clear ‘market-friendly’ outcome. A little political chaos may be the best of a bad bunch.
What now for Macron’s pro-business agenda?
It's hard to know how much of President Macron’s pro-business policies are genuinely at risk for now. The Nouveau Front Populaire coalition of left-wing parties wants to reinstate wealth taxes and higher corporate taxes, increase the minimum wage, lower the retirement age, and cap prices on basic goods.
All of this requires stable leadership, which we currently lack. We don't even know if the Left coalition will hold, given the ideological differences among its members.
Far-right biding its time
We face the real possibility of prolonged political deadlock. President Macron insists he intends to see out his term until 2027, but it seems highly improbable that enough members of parliament will agree to a common agenda.
Meanwhile, the far-right can afford to wait. They have been growing for decades and are now the largest single party in the French lower house. A period of political deadlock could strengthen their support, possibly leading to success in future presidential or legislative elections. If this happens, France could become a significant step in normalising far-right politics across Europe.
French voting mechanics and election outcome
To explain the shock result it’s worth looking at the French voting system. The election has once again highlighted the complexities of political forecasting. While the first round often aligns with national vote projections, accurately predicting seat allocations for the second round remains elusive due to dynamic political strategies.
Following the first round, markets reacted positively, with an absolute majority for RN appearing less likely. The focus shifted to the potential for a hung parliament, given the high number of "triangulaires," the three-way contests that occur in the second round of legislative elections.
The second round's results underscored the difficulty of accurate predictions. The "Republican Front" strategy, where candidates withdrew to bolster those with a better chance of defeating RN candidates, introduced numerous local variables. Each of the 306 triangulaires became akin to individual horse races, influenced by party dynamics and voter behaviour.
A UK-style ‘first-past-the-post’ system with only one round would have resulted in a majority for RN. Therefore, we should view the second-round outcome as a consequence of the voting system rather than a resurgence of left-wing support.
Navigating uncertainty in French assets
Turning back to markets, the current uncertainty is likely to impact the macro level rather than individual stocks or sectors. Once the political situation clears, winners and losers will likely emerge. From a macro perspective, two key measures will be the impact on French assets in isolation (the relative performance of the CAC40 Index and French government bonds vs peers) and the risks of Eurozone contagion.
As risk managers our strategy focuses on preparation rather than prediction. The French political backdrop is now particularly primed for instability and potential shocks. Market volatility in French and European securities will reflect the likelihood of political improvement or deterioration. It requires redoubling efforts to analyse a range of potential outcomes, identify factors that could lead to unexpected shifts, and assess the resilience of our portfolios against these disruptions.
Monitoring market developments and rigorously stress-testing our assumptions will be increasingly necessary regarding French assets. Maintaining a flexible approach and liquid portfolios is equally important.
With contributions from Adam Singleton, CIO of External Alpha, Solutions, and Thomas Simonneau, Risk Investment Risk Manager, Solutions, at Man Group.
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