French political risk: A 'sense of déjà vu' for investors
Political risk in France has once again captured the attention of investors. French Prime Minister François Bayrou’s decision to call for a vote of confidence in his government on 8 September has reignited concerns about the stability of French assets. This decision comes in the context of a debate surrounding France's hefty budget deficit. Prime Minister Bayrou has set an ambitious goal to trim at least EUR 44 billion from the country’s budget in an effort to address France’s towering public debt, which is 114% of GDP. However, Bayrou's efforts face significant political resistance. For investors, this moment feels all too familiar, a renewed echo of political uncertainty that has long plagued France.
Impact on the markets
Since Prime Minister Bayrou's announcement, three notable reactions have occurred in the financial markets:
- French equities underperform
French equities are underperforming European equities, with the CAC40 down 3% compared to a 2.1% decline for the DJ Euro-Stoxx50 from the moment the news broke on Monday until the close on Friday, August 29. Global equities remain unaffected. - Rising French interest rates
French interest rates have slightly increased, particularly the French 10-year yield, which rose by 9 basis points to close the week at 3.51%. France's risk premium relative to Germany, measured as the spread between French and German 10-year yields, widened to 79 basis points from 70 basis points prior to the announcement. - Profit-taking in the financial sector
Finally, within the French equity market, the financial sector has seen significant profit-taking. While the sector faced challenges across Europe, the impact was felt the hardest in France.
A sense of déjà vu
The current political jitters bear resemblance to events in June 2024, when President Emmanuel Macron dissolved the country’s parliament, the National Assembly, in response to poor performance by his party in the European parliament elections. This triggered market movements similar to those seen today, but on a larger scale. The CAC40 index dropped by nearly 7% within a few days, underperforming European markets, which fell by 4.5%. The French 10-year bond yield rose by about 30 basis points to 3.35%, with the risk premium climbing to 80 basis points within a matter of weeks. Finally, the French financial sector particularly underperformed.
Since then, the French political context has remained uncertain, marked by the President’s difficulties in appointing a Prime Minister following the July 2024 legislative elections, the fall of MichelBarnier's government on December 4, 2024, and the developments of recent days. This uncertainty is reflected in the underperformance of French assets.
French equities have seen only modest gains over the past year, up 3.5% between June 2024 and August 2025. Over the same period, Eurozone markets (DJ Euro-Stoxx index) and US markets (S&P 500 index in USD) gained 16.2% and 22.8%, respectively. In terms of interest rates, the risk premium on French debt remains at higher levels than at the beginning of 2024 (see graph below).
Political and market scenarios
The French political situation remains highly fluid. Three scenarios are being considered for the coming days:
- Parliament grants confidence to the Prime Minister
If Prime Minister Bayrou secures parliamentary confidence, French equities are likely to recover, and the risk premium could quickly return to mid-August levels. However, this scenario appears unlikely given the political parties' reactions, despite the Prime Minister's willingness to negotiate. - Government falls, and a new prime minister is appointed
In this scenario, President Emmanuel Macronappoints a new prime minister to form a government. French assets may stabilise in the short term, but their ‘chronic’ underperformance is expected to persist. For now, we consider this scenario the most likely. - Government falls, and the Assembly is dissolved
If the government falls and President Macron dissolves the National Assembly for new legislative elections, uncertainty would rise significantly. French equities and, to a lesser extent, European equities would come under pressure, with movements potentially similar to those of June 2024. The French debt risk premium would widen further, surpassing the levels seen in 2024.
Investment Policy
The return of French political risk fits into a broader pattern of heightened (geo)political uncertainty, which has been increasing over the past decade. Recent financial history teaches us that while uncertainty generates short-term volatility, it generally does not derail underlying market trends. For example, despite numerous shocks since 2016 (Brexit, the trade wars of 2018 and 2025, conflicts, etc.), the S&P500 and CAC40 indices have risen by 274% and 123%, respectively, as of August 29, 2025.
For now, the resurgence of French political risk has led to only a modest increase in volatility, primarily localised to French assets. However, while French assets are bearing the brunt of this volatility, the rest of Europe has shown a tendency to follow suit, at least directionally. Our investment policy remains unchanged. We keep a neutral position in equities and a modest overweight in fixed income, favouring high-quality bonds. We continue to view a soft landing for the global economy, supported by central banks, as the most likely scenario despite ongoing economic uncertainties stemming from the trade war.
We remain vigilant to upcoming developments and are committed to supporting you during this phase of uncertainty.
Olivier Raingeard
Global Head Equities