French Stocks Dip 2.4% Amid Election Worries, S&P Downgrade

Key Takeaway

• French stocks, particularly domestically-focused firms like Societe Generale and Vinci, plunged due to election uncertainty and S&P's credit rating downgrade.
• The CAC 40 index fell as much as 2.4%, making it the worst-performing major Western European benchmark this year.
• Heightened market volatility is expected, with options pricing indicating increased concern for the next month.

Election Uncertainty Impacts French Stocks

French stocks experienced a significant downturn following President Emmanuel Macron's announcement of a snap election. The CAC 40 index plunged on Monday, driven by the political uncertainty stemming from Macron's decision, which followed his party's defeat in the European Parliamentary vote. This political development has particularly affected domestically-focused companies, with banks and construction firms bearing the brunt of the impact. Notably, Societe Generale and Vinci, which derive approximately 40% of their annual revenue from France, saw substantial declines.

A Goldman Sachs-compiled basket of firms focused on the French market, including Societe Generale, Credit Agricole, Vinci, Eiffage, and several telecoms, utilities, and real estate firms, has erased more than half its gains from the past year compared to an internationally exposed equivalent. Options pricing indicates heightened concern as bets on volatility in the French stock market one month from now have risen to their highest levels in about two months.

Financial and Economic Concerns

The election uncertainty is not the only factor weighing on French stocks. S&P Global recently downgraded France's credit rating, citing the government's failure to contain the budget deficit. Additionally, rumors of Macron's potential resignation, which were denied by a close associate, have further unsettled the markets. This backdrop is compounded by challenges faced by some of the CAC 40's major luxury names, which are dealing with slowdowns in China and the US, and a general lack of tech sector representation.

French earnings momentum is also lagging behind broader European stocks. The CAC 40's 12-month forward EPS has increased by about 1% over the past three months, compared to approximately 3% for the Stoxx 600. The CAC 40's 12-month forward P/E is currently in line with its 10-year average, suggesting that French stocks are unlikely to command a premium in the near future, especially as they continue to underperform their major Western European peers this year.

Market Reactions and Analyst Views

The CAC 40 has been the worst-performing major Western European benchmark this year, largely due to a challenging environment for luxury stocks and a lack of technology sector representation. The index fell as much as 2.4% in early trading on Monday, with all its members experiencing declines. Banks such as Societe Generale and construction giant Vinci led the losses, with election uncertainty expected to weigh more heavily on domestic sectors.

Concerns about public finances have also been exacerbated by S&P Global Ratings' recent downgrade of France. The broader European market has seen construction, autos, and consumer products as the biggest decliners following the European Union elections, which saw far-right and populist parties increase their share of the vote. For carmakers, there is potential for a push to delay the ban on the sale of new combustion engine vehicles from 2035 and an increase in import taxes on Chinese electric vehicles.