France’s Snap Election Ends Where It Began

Plus ça change, plus c’est la même chose. Yes, the more things seemed to change in French politics the past few weeks, the more they ended up staying the same. Before the two-round snap election held 30 June and 7 July, France had a hung Parliament (i.e., no party held a majority). And now, after a contentious runoff concluded Sunday, France has—wait for it—a hung Parliament.^[i] Investors gained clarity, and markets got the gift of falling uncertainty, in our view.

Markets seemingly started pricing this in last week, when French stocks rallied after the first round.^[ii] Even though the populist National Rally (NR) took first place, the likelihood of the nationalist party winning an outright majority appeared to be plummeting. The left-green alliance called the New Popular Front (NPF) and President Emmanuel Macron’s centrist Ensemble Party were forming a broader alliance, strategically pulling their third-place candidates and telling their supporters to vote for the other.^[iii] To us, this raised the likelihood no party would win a majority, ensuring political gridlock would continue.

And so it went. The NPF and its small-party allies finished the runoff in first place, with 181 seats in the 577-seat National Assembly.^[iv] Ensemble and its allies took 163, leaving NR and its allies with just 143.^[v] The centre-right Republicans finished a distant fourth amongst major parties with 39 seats.^[vi]

And just like that, widespread chatter we saw of a spendthrift NR government pushing through big deficits, windfall taxes and other potentially disruptive policies fizzled.

Yet we are still seeing some warnings of potential trouble, which means there is still room for falling uncertainty to boost stocks, in our view. Headlines we follow didn’t flip immediately to celebrating a gridlocked government. Instead, they dwelled on the NPF’s win and speculated on the concessions Macron would have to make in order to pass budget legislation.^[vii] Some warned recent pension reforms could be reversed.^[viii] Others suggest Macron will have to concede on fiscal restraint and bless a higher deficit, potentially weighing on markets.^[ix]

Perhaps, but this talk isn’t new. Ensemble and NPF were the two largest parties before this election, too.^[x] The size advantage may have flipped, but Macron still theoretically relied on leftist votes to pass legislation before the election. Therefore, the same concessions commentators we follow dwell on now were entirely possible for the past two years. And the pension reforms that raised the retirement age? Both the NR and NPF have talked up reversing those.^[xi] Yet French stocks did fine anyway.^[xii] Given nothing has fundamentally changed, we doubt new stumbling blocks suddenly appeared.

Which, in our view, means there is room for falling uncertainty to lift French stocks up the proverbial wall of worry, parallel to the UK. In both places, the widespread discussion of potential political stock market risks we have seen is old and grizzled, not new and surprising to stocks. In our view, this sets expectations low and makes the likelihood of reality exceeding them high. We doubt either will soon become a bastion of free-market reform, but we don’t think they need to. For stocks, a muddled extension of the status quo would likely be a relief—and the probability looks high, in our view.