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2024 shock French election result – what investors need to know

Who has won the French parliamentary election, what’s next and what do investors need to know?
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Politicians and investors were left in shock yesterday as the second round of voting concluded the 2024 French parliamentary election.

The left-wing alliance, made up of a number of left-leaning parties including the Socialists and the far-left France Unbowed party, won 182 seats and are the largest political block in the French parliament. However, they fell short of winning the 289 seats that are needed to form a government.

Ahead of the second round of voting, the far-right party, National Rally had won the largest share of votes. But, the party led by Marine Le Pen fell to third place on Sunday (143 seats), behind Macron’s centrist Ensemble party (168 seats).

Hung parliament – what happens next?

Since no party secured a majority, the onus is now on the left-wing alliance, the New Popular Front, to form a government. However, the main parties within the New Popular Front have ruled out forming a coalition with President Macron’s centrist Ensemble party.

Without forming a coalition with the centrists, it’s hard to see how the New Popular Front can form a government.

The incumbent prime minister, Gabriel Attal, offered his resignation to President Macron on Monday. However, his resignation was refused, and he’s been asked to stay on as a caretaker prime minister to ensure political stability.

France is likely to experience a period of political deadlock, as the horse trading begins and the French left try to cobble together a coalition government, which could take some time.

From a policy perspective, this means that little will change in France until the new government is formed. Until we know who the government is, then it’s hard to know what the future holds for France.

How have financial markets reacted?

French financial markets were rocked by President Macron’s call for a parliamentary election last month, and they sold off sharply.

The French stock market fell significantly in June, the month that the election was called.

This was led by a sharp decline in the French banking sector, with Société General and Credit Agricole falling heavily in June, which pushed these stocks into ‘correction’ territory – this was mainly thanks to French bond yields.

The yield spread between France and Germany surged to 80 basis points – its highest level since 2012 at the peak of the sovereign debt crisis in Europe.

The reason for the sell-off was concerns about France’s financial future under a new government.

France has a large deficit, at 5.5% of GDP. This is already in breach of EU fiscal rules, and last month, France was reprimanded by the EU Commission for doing so.

The EU Commission opened an excessive deficit procedure with France to kickstart a process to force it to negotiate with Brussels to get its deficit back on track.

The risk is that the new government will exacerbate the French fiscal position. A French government with elements of the far left could cause an increase in public spending and taxation, which is likely to send shivers down the spine of investors and potentially cause a sell-off in French bond markets.

Since French domestic banks hold 15% of French sovereign debt, a decline in the price of bonds led to fears about losses on the balance sheets of French banks.

However, since France has a hung parliament, it could be weeks or even months before a new government is formed, if a government can be formed. So, the market reaction to this result has been muted.

While there’s been a recovery in French stocks and the yield spread between France and Germany in the immediate aftermath of the first round of voting, French assets haven’t clawed back all their losses since the election was first announced.

Past performance isn’t a guide to future returns.
Source: Bloomberg, 01/07/24.

This article isn’t personal advice. All investments and any income from them can rise and fall in value, so you could get back less than you invest. Yields are variable and no returns are ever guaranteed. If you’re not sure whether a course of action is right for you, ask for financial advice.

Kathleen Brooks is the Founder of Minerva Analysis, a market analysis company. Hargreaves Lansdown may not share the views of the author.

How to invest in Europe?

The variety of companies and different economies in Europe can make it tricky to know where to invest.

If you’re looking to invest in Europe and want an expert to do it for you, you could consider the HL European fund.

The HL European fund lets you leave the fund manager selection to us and let you invest in lots of different European shares. It could be a good option to form part of a globally diversified growth-focused portfolio.

This fund is managed by Hargreaves Lansdown Fund Managers Ltd, part of the Hargreaves Lansdown Group.

Article image credit: Anadolu / Getty Images.

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Written by
Kathleen Brooks
Kathleen Brooks
Founder of Minerva Analysis

Kathleen Brooks is the Founder of Minerva Analysis, a market analysis company. An industry expert with over 10-years experience working for retail trading providers in the City of London, she is routinely quoted by the world's top financial press including the Financial Times and Wall Street Journal.

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Article history
Published: 8th July 2024