The French have voted: and now?
With a turnout of 66.7%, the second round of the French legislative elections delivered its verdict last night: the leftist Nouveau Front Populaire won 182 seats; Emmanuel Macron’s centrist Ensemble pour la République retained 168 seats; Marine le Pen’s Rassemblement National won 143 seats. Les Républicains and other right-wing parties reached 60 deputies, while other left-wing parties won 13 seats. As a consequence, no party obtains an absolute majority of 289 deputies.
Political scenarios
In France, the President of the Republic, Macron, is the only person able to appoint the Prime Minister, with no deadline for doing so. In the French law, article 49 gives the National Assembly the power to overthrow a government by passing a motion of censure. Traditionally, therefore, the representative of the majority camp is appointed to form the government. And, a new dissolution cannot occur within a year.
With these election results, with no absolute majority for one party, France finds itself in an unprecedented situation in the Fifth Republic. Political analysts are considering multiple scenarios, ranging from a government based on a plural majority to a technocrat-led government. The political situation is likely to develop over the next few days. But what we already know, is that current Prime Minister Gabriel Attal is expected to tender the resignation of his government to Macron, the President of the Republic. The first sitting of the 17th legislature of the National Assembly will begin on Thursday 18 July.
After these few weeks, we may experience a period of political instability that will prevent the implementation of structural reforms for France and potentially for the European Union.
Impact on financial markets
Since the results of the first round a week ago, European equity markets have rebounded with circa 1% - in particular, the French CAC40 index, which rose by 2.6%. US and emerging markets have continued their upward trend. Regarding government bonds, the French 10-year yield fell back, to close the week at 3.2%.
Monday noon at 12.30, the Eurostoxx50 was up 0.5% and the French 10-year yield, after a slight opening decline, stabilises around 3.2%. The euro remains stable at around USD 1.0838. The spread between French and German 10-year bond yields rose from around 50 to 80 basis points after Macron announced new elections, but has come in to 63 basis points today. This is an indication the tension in the markets is diminishing.
Investment policy
We hold on to our investment policy. We are slightly overweight equities and bonds, as we still consider the scenario of a soft landing for the global economy to be the most likely, supported by the policies of central banks. Within equities, we are overweight US equities.
Once again, we would remind you of two fundamental principles of financial investment. First, geographic and sector diversification generally helps to absorb shocks from political uncertainty. Also, French equities represent less than 20% of our portfolio, while international equities make out almost 50%. Second, recent history has taught us that while political uncertainty generates short-term volatility, it does not generally call into question current trends. Indeed since 2016, the S&P500 and the CAC40 have gained 165% and 106% respectively (to the end of 2023), despite numerous shocks of political uncertainty. Think of Brexit, the US-China trade war and conflicts in Ukraine and the Middle East,.
We will, of course, continue to keep a close eye on future developments and update you if the situation so requires.