Wall Street eyes battered French assets as government faces collapse
France’s government is on the brink of collapse in a parliamentary confidence vote that has battered the country’s stocks, but some investors are betting the market has oversold French assets and are looking for bargains. The political crisis, triggered by a standoff over the government’s budget, has seen the MSCI France stock index lag its peers by some distance. It is up just 4.2% this year, compared with gains of 33% in Spain and 23% in Italy over the same period. Even the MSCI indexes for Germany and the United Kingdom – both beset by their own significant economic problems – have risen 14% and 13% respectively. When Prime Minister Francois Bayrou called the vote in late August, the benchmark CAC 40 index fell 3.3% that week. The vote, which Bayrou is widely expected to lose , centers on his government’s contentious 44 billion euros ($51.3 billion) deficit-cutting plan. A defeat would force his resignation and that of his government, leaving President Emmanuel Macron to either appoint a new prime minister or call for snap parliamentary elections. Despite the turmoil that has created a specific risk premium on French assets, some analysts point to surprisingly strong fundamentals that could underpin a market rebound. “France is in the headlines, but we note that it has already lagged the rest of the Eurozone meaningfully this year, and the headline news flow risk might soon move behind us,” said Mislav Matejka, a strategist at JP Morgan, in a note to clients on September 8. That view is supported by recent economic data showing France’s fiscal performance has improved this year, driven by stronger-than-expected revenues. The central government’s July deficit was smaller than a year prior, an outcome consistent with the government’s full-year deficit target of 5.4% of GDP. Downside risks priced in Others suggest the political risk itself may be overstated. George Saravelos, global head of FX research at Deutsche Bank, said it is “not clear to us that the alternative that emerges would be worse than the current status quo”. He added that France’s de facto coalition has been “actually delivering on the tightening that was agreed”. This disconnect has also attracted professional investors. A recent widening in French bond spreads has “already drawn some HF [Hedge Fund] interest,” said UBS strategists led by Julien Conzano in a note to clients. The bank added that while some investors are wary of tail risks, others are “actively considering increasing exposure to French assets”. The increased risk premium has left French stocks trading at a deep discount. The CAC 40’s forward price-to-earnings ratio relative to the broader Euro Stoxx 50 is near the bottom of its historical range, making it appear “very attractive on valuations”, according to JPMorgan’s strategists. Still, investors remain on high alert for downside risks. Ratings agency Fitch is scheduled to review France’s ‘AA- with a negative outlook’ credit rating on September 12. Analysts at Investec said that given the political turmoil and fiscal outlook, a “risk of a downgrade cannot be discounted”. For professional investors, investment banks highlighted one “tactical angle” trading idea involving shorting 10-year French government bonds (OATs) against interest rate swaps, a direct bet that France’s risk premium will rise as uncertainty peaks around the vote.
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