Seeking investment opportunities from French fiscal crisis

The collapse of Prime Minister François Bayrou’s government following a failed confidence vote has raised concerns across Europe. The episode highlights France’s structural challenges: public debt at 114 per cent of GDP, a deficit approaching 6 per cent, and a parliament deeply divided between the far left and the far right.

Yet wealth managers and investment strategists suggest that while the headlines point to instability, the investment implications are more nuanced.

The key for ultra-high net worth individuals is not to react in haste, says Edmund Shing, global chief investment officer at BNP Paribas Wealth Management. “We are advising clients most importantly not to react in a knee-jerk fashion to the current uncertainty and related market movements,” he explains.

French equities and bonds have proven relatively resilient so far, with the CAC 40 showing signs of recovery and the 10-year OAT-Bund spread holding steady at around 0.8 per cent.

Mr Shing believes that volatility could even provide opportunity. “In the near term this uncertainty and the related market movements may give some attractive entry points for long term-oriented clients in certain corporate bonds and stocks,” he says, pointing to a continued preference for domestically oriented eurozone mid- and small-cap stocks.

For many clients, high liquidity levels mean there has been more questioning than repositioning. From a broader perspective, Mr Shing argues that France’s fiscal challenges must be viewed in a global context.

“The US and UK are both running just as wide a budget deficit this year as France. In terms of urgency, if anything the US and UK are more pressed to improve their debt dynamics,” he says, viewing eurozone investment-grade corporates as more attractive than government bonds, given their robust balance sheets and cash flows.

Others are less bullish about France’s trajectory. Fiona Frick, an investment management veteran and founder of Circe Invest, cautions that while France is not about to collapse, its influence within Europe is waning.

“There is a problem of growth in Europe, and there’s a problem of fiscal deficit,” she says. “With the French government always in turmoil, it is very difficult to solve the fiscal deficit and get to a budget acceptable for both Europe and the French people.”

This uncertainty has consequences for portfolio allocation. “More comfortable with investment in Europe, less comfortable with investment in France,” Ms Frick notes. She highlights valuation opportunities and strong dividend yields in European equities, particularly in Germany, Italy and Spain, alongside themes such as defence and energy sovereignty.

By contrast, she remains wary of French sovereign debt, arguing that the OAT-Bund spread is likely to persist given structural political gridlock. “Any government has to create alliances in a divided assembly, but there is no composition to pass the fiscal austerity required,” she warns.

Last of the summer wine

The summer’s bullish tone in markets is giving way to a more cautious final stretch of the year, according to Alberto Matellán, general manager of MAPFRE’s French asset management arm La Financière Responsible. 

“Stockmarkets have enjoyed a very strong year so far, and the fundamentals suggest this optimism could continue,” he says. “That said, professional investors are likely to start closing positions to avoid potential losses in the final stretch.”

Bond markets tell a more complicated story, with long-term yields rising on concerns that include sovereign risk. France, he notes, is under particular scrutiny: “Bayrou resigning has already been priced in, and the real challenge lies in forming a government capable of reducing the deficit. In my view, there simply isn’t a government capable of carrying this out.”

On interest rates, Mr Matellán argues against expectations of imminent relief: “Markets typically favour lower interest rates, but a cut in Europe wouldn’t be justified from a macroeconomic perspective.”

While the situation is not perfect, he notes that Europe is still experiencing growth, with inflation hovering around 2.1 per cent.

A call to balance investor expectations amid French political gridlock comes from Aline Goupil-Raguenes, strategist at Ostrum Asset Management, part of Natixis Investment Management, which oversees assets of $447.3bn. “France is not on the verge of collapsing. Growth is continuing but at a moderated pace,” she says, noting that government growth targets for 2025 remain within reach.

The downside risk, she says, comes from weakening domestic demand as households and business leaders adopt a more cautious stance amid uncertainty.

For institutional clients, Ostrum is advising vigilance. “We warn them about volatility. We have a negative outlook on France’s spread and prefer peripheral countries instead, given the limited contagion and their better economic fundamentals,” Ms Goupil-Raguenes explains.

For French entrepreneurs, however, the persistent instability is taking a toll. With Sébastien Lecornu now the country’s fifth prime minister in two years, she notes that a divided National Assembly makes fiscal consolidation unlikely, holding back investment and hiring decisions. “In the face of this political uncertainty, investors are becoming more cautious and tend to slightly reduce maturities in this context. They prefer to favour peripheral countries given the low contagion effects.”