French snap elections: Machiavellian or tête brûlée?

In this accompanying paper, Zehrid Osmani details his thoughts and implications for investors after French President Macron surprised everyone with his snap election announcement.

The first round of voting in the French parliamentary elections over the weekend confirms that the right-wing Rassemblement National (RN) party is in the lead, whilst President Macron’s moderate Ensemble alliance is coming in third, as the polls had predicted.

The market is reacting positively to what seems to be a less strong lead by the RN party, which reduces the risk of an outright absolute majority post the second round to be held on July 7.

The French system of two rounds makes it difficult to predict an outcome with a high degree of certainty at this stage, but if we end up with the RN having a weak majority, or a split assembly, we will end up with a weak government position. As flagged in our report last week, we believe that a cohabitation period with the RN party nominating the prime minister will lead to political paralysis in France or at least slower political decision-making.

This week will be one of political jockeying between the parties, and likely Macron will seek some alliances to form a working coalition, should the Assembly be split three ways after the second round on July 7. This could be the period during which Macron’s party attempts a Machiavellian outcome to transform his surprise snap election decision from a reckless risk into a calculated demand on the French electorate for more support and more political unity, by calling for the solidarity vote against extremist parties.

In any of the scenarios faced, we do not believe that France will deviate from its budget constraints vis-a-vis the European Union (EU), and therefore we reiterate that market fears of unorthodox policies and fiscal expansion are overdone. In our view, this is creating a buying opportunity in French equities, given the selloff ahead of this increased political uncertainty in one of the key EU member states.

Sectors that have sold off the most, notably banks, utilities and infrastructure stocks, which typically are seen as more sensitive to sovereign spreads, will likely be more prone to recover. At the same time, investors should note that French corporates in the CAC40 Index¹ are generally large, multinational companies, and therefore have a significant portion of revenues generated outside of France, and even outside of Europe. This highlights that the selloff, on the back of French sovereign risk, might be a buying opportunity for names that are quoted on the French market but less exposed to France specifically.

Ultimately, the French parliamentary elections do shine further light on the potential political risks to take into account in the run up to the French Presidential elections of 2027, should the RN party continue to gather strong electoral support and should Macron not have a charismatic candidate to take over from him by then.