Paris loses stock market crown to London as political upheaval looms

London
CNN
 — 

London’s stock market has edged ahead of its rival in Paris as fears grow over the outcome of France’s looming parliamentary elections.

All stocks listed in France are now worth about $3.13 trillion in total, compared with $3.18 trillion for all shares listed in the United Kingdom, Bloomberg reported Monday, based on the data it had compiled.

On Tuesday, the CAC All-Share index in Paris was still marginally bigger than London’s FTSE equivalent, but the latter only accounts for 98% of the market value of UK-listed shares.

London’s comeback as Europe’s biggest equity market is “mostly” the result of French President Emmanuel Macron calling snap elections for June 9 after his party was trounced by the French far right in a vote for European Union lawmakers, according to Axel Rudolph, a senior market analyst at trading platform IG Group.

“Financial markets don’t like uncertainty, and the fact that you’ve had such a shift to the right in the French European elections has led people to worry (about what comes next),” he told CNN.

Since June 9, the CAC 40 of leading French stocks has shed more than 5% of its value — equivalent to $160 billion — as investors ponder the prospect of the far-right National Rally playing a much bigger role in the parliament of Europe’s second-largest economy.

The first round of the French elections is scheduled for June 30, followed by a second round on July 7.

An opinion poll by research firm OpinionWay released Friday showed that 32% of respondents intended to vote for the National Rally in the first round, 25% for a coalition of left-wing parties, and 19% for Macron’s centrist party.

French banking stocks have fared particularly badly since Macron called the elections. Shares in Société Générale have tumbled nearly 14%, while shares in BNP Paribas and Credit Agricole have fallen 10.6% and 11.2% respectively.

Hubert de Barochez, a senior market economist at consultancy Capital Economics, said investors might be concerned that a parliament run by the National Rally would penalize banks.

“Generally, quite populist governments attack banks and their proceeds… (There) might be fears about additional taxes on banks,” he told CNN.

Another reason for the rout in French banking stocks is the fact that “banks own quite a lot of the country’s public debt,” he added.

The prices of those government bonds have fallen since June 9, driving up their yields or interest rates demanded by investors as they see a higher risk in holding the debt.

A parliament dominated by the far right could make it harder to reduce France’s huge government debt pile, equal to 110.6% of gross domestic product at the end of last year, and could even add to it. A bitterly divided assembly would also struggle to cut the budget deficit — the gap between government spending and tax receipts — which reached 5.5% of GDP last year.

In contrast with the political and financial turmoil in France, UK financial markets are “relatively stable,” said Rudolph at IG Group. The UK is gearing up for its own general election on July 4, which the opposition Labour Party is predicted to win by a wide margin.

In addition, now that uncertainty surrounding Brexit has subsided and Britain has come out of a short recession, investors are snapping up stocks in UK companies, attracted by their low valuations compared with US stocks, Rudolph added.

Similarly, Richard Hunter, head of markets at Interactive Investor, an investment platform, wrote in a note Tuesday: “There are increasing signs that the UK is gaining some favor among overseas investors, given its mix of stable, cash-generative companies which are cheap by comparison (with French stocks) by historic standards.”

On the other side of the English Channel, the National Rally has promised to raise public spending and slash VAT on electricity and fuel if it comes to power.

Credit ratings agencies are already keeping a close eye on France, one of the EU’s three most-indebted countries. Last month, S&P downgraded the country’s long-term credit score and said it expected its budget deficit to narrow to 3.5% of GDP in 2027, well above the 2.9% targeted by the current government.

Mohit Kumar, chief economist for Europe at Jefferies, an investment bank, wrote in a note Tuesday: “Our view on France remains that yes, we should be worried about the debt and deficit picture… We do not see French deficit coming below 3% over the next five-year horizon.”