French elections impacting French assets
With an estimated turnout of 67%, the highest since 1997, the first round of the parliamentary elections delivered its verdict last night. Rassemblement National (including the alliance with a part of the right-wing party) won 33% of the votes, followed by the Nouveau Front Populaire (alliance of left-wing parties) with 28%, Macron’s Ensemble pour la République (centrists) with 21% and Les Républicains (right-wing party) with 10% of the votes. The other parties received less than 5%.
Projections of polling institutes in terms of seats in the National Assembly point to a relative - or even absolute - majority to Rassemblement National. However, pollsters warn these estimates should be treated with caution, given the large number of districts with potentially three candidates qualified for the second round, on Sunday 7 July, calls for withdrawals of candidates and voting instructions, and given the fact that voter turnout could change.
Impact on the markets
The legislative elections have mainly affected French assets. Since the announcement of the dissolution of the National Assembly at the beginning of June, performance of various asset classes has been as follows (as of Friday 28 June end of day). Equities, measured by the French index CAC40, were down 6.3% and the Eurostoxx 50 is down 3%, while the US and emerging markets are up 2.2% and 1.6%. Regarding government bonds, the French 10-year yield rose from 3.10% to 3.3%. The risk premium on French government bonds, measured by the spread between French and German 10-year yields, deteriorated to 80 basis points. The euro remained relatively stable at around 1.07 versus the dollar.
On Monday at 12:00 am, Asian markets showed little change, with Japan up 0.52% (Topix index). In Europe, the Eurostoxx 50 is up 0.7%, while the French 10-year yield stabilises close to 3,3%. Also, the EUR/USD recovered up to 1.0755.
Investment policy
Our investment policy remains unchanged. We are slightly overweight equities and bonds, as we still consider a soft landing for the global economy to be the most likely the scenario, supported by central banks. Within the equity allocation, we hold on to our preference for the US over Europe and a diversification in emerging markets.
Why diversification matters
It is worth recalling two core investment principles. First of all, geographical and sector diversification generally helps to absorb shocks caused by political uncertainty, such as this one, which mainly affects only French assets. For example, French equities account for less than 20% in our dynamic portfolio and international equities for almost 50%. Furthermore, recent history teaches us that while political uncertainty generates short-term volatility, it does not generally call into question the dynamics underway. Indeed, since 2016, despite numerous shocks of political uncertainty such as Brexit, the US-China trade war and the conflicts in Ukraine and the Middle East, the S&P500 and the CAC40 have gained 165% and 106% respectively (to the end of 2023).
We continue to closely monitor the situation and remain committed to supporting our clients through this period of uncertainty.