No, France’s Elections Don’t Have a Winner Yet

Editors’ Note: MarketMinder Europe prefers no political party nor any candidate. We assess developments for their potential economic and market impact only.

This year’s busiest political week—perhaps barring November’s US election—got off to a fast start Monday as investors digested the first round of France’s snap election. Headlines we follow portrayed it as a monumental shift, with some going so far as to declare the “far right” has “won,” which may have some quivering given the sharp selloff just weeks ago on similar sentiment.^[i] Yet, in our view, markets seemed overall pretty unbothered: The MSCI France Index jumped 1.2% Monday.^[ii]

What gives? In our view, Markets have been pricing election uncertainty since President Emmanuel Macron called the contest three weeks ago.^[iii] Now, it seems to us they are pricing the likelihood that the real winner is political gridlock.

Here is what actually happened Sunday: The populist National Rally (NR) won a plurality of the vote, 33.2%.^[iv] This party, which commentators we follow commonly label hard right or far right, is a hodge podge of nationalism and economic policy that, in our experience, would typically be associated with traditional leftism. Hence, we have seen some posit that if NR were to gain legislative control, its high spending would make France’s finances unsustainable whilst its windfall taxes would render industry uncompetitive, hamstringing growth.^[v] The only hope, some headlines we follow said Monday, was that a market panic would force fiscal sanity.

But this presumes NR wins an outright majority. In the 577-seat National Assembly, this requires 289 seats. On Sunday, NR won—wait for it—38 seats.^[vi] That means it needs to win another 251 in Sunday’s runoff.

In our view, that is a much taller order than winning the top share in a split field. Yes, NR won the most votes, and it came in first in 296 of the 577 seats it contested. But in 258 of these, it won less than half the vote, hence the need for a runoff.^[vii]

France’s politics are fractured. The left-green alliance called New Popular Front (NPF) finished second, winning 28.1% and 32 seats outright. Macron’s centrist Ensemble party took third. Whilst it won only 3 seats outright, it took 22.8% of the vote. The traditional centre-right Republicans were a distant fourth, with 2 seats and 9.8%.^[viii]

Of the remaining seats, 306 will be a 3-way runoff amongst NR, NPF and Ensemble.^[ix] Due to the NR’s history and international reputation, NPF and Ensemble are making a concerted effort to block it from winning a majority and its co-leader, Jordan Bardella, from becoming prime minister.^[x] Each party has pledged to withdraw its third place-finishing candidates in order to consolidate the anti-NR vote.^[xi] This worked in 2022, limiting NR to just 89 seats.^[xii] Math and polling suggest to us it could similarly bear fruit next Sunday, delivering another hung parliament.

In our view, this is what stocks seemed to be eyeing Monday. As Exhibit 1 shows, they digested fears of an NR government rapidly, falling -6.9% from 7 June through 14 June.^[xiii] But we think Monday’s bounce, which far outpaced global stocks, suggests some relief is now seeping in as markets see gridlock being likely to continue.

Exhibit 1: Markets Digest the French Election

Source: FactSet, as of 1/7/2024. MSCI France and MSCI World Index returns in GBP with net dividends, 31/5/2024 – 1/7/2024.

Hence, we think policies publications we follow warn risk troubling France’s markets and economy—whether from NR or NPF—probably have a low likelihood of coming to fruition. Some analysts we follow warn teaming with NPF could be an own goal for Ensemble, potentially landing NPF enough seats to form a spendthrift coalition with NR. But we have seen this movie before, in Italy, when a nationalist and anti-establishment leftist party formed a populist coalition government in 2018.^[xiv] They ended up passing very little, and the coalition collapsed quickly.^[xv] For all their shared populism, they had little policy common ground. Leaders may have wanted to compromise to get things done, but the rank and file seemingly preferred ideological purity to watered-down bills. We could see it easily going the same way in France.

So overall, we see a high likelihood that the next French government, whatever form it takes, does far less than headlines deem likely. Then too, our research shows global factors matter more than local, and there are powerful tailwinds. Not just from a growing global economy, but from the US presidential election, whose positive force our research finds regularly extends abroad. Add in falling uncertainty as investors finally see the shape of the next French and UK governments, and we think markets will likely have plenty of relief to price in.