French Parliamentary Election Poses Unpriced Risks for European Stocks, Warns Citi
The recent French parliamentary election has caused unease among investors as the country's risk premium rises. However, according to Citi, there are two possible scenarios that have not yet been fully priced in by markets, which could have significant implications for stocks in the wider European region. Beata Manthey, the head of global equity strategy at the bank, highlighted that the current market pricing reflects a range between a benign outcome and a gridlock, with the market still a few percentage points away from fully pricing in the potential for a gridlock scenario.Of particular concern are the risks posed by a far-right or far-left majority in the French Parliament. The policies and proposals of both the hard-right Rassemblement National (RN) and the left-wing Nouveau Front Populaire (NFP) parties could lead to increased bond market volatility and potentially even a debt crisis if either party were to gain a majority and swiftly implement their agendas. Despite both parties expected to outperform the centrist coalition in the first round of voting, the path forward remains uncertain.Citi conducted a scenario analysis to assess the potential outcomes of the election on Paris's CAC 40 stock market index, taking into account movements in the spread between French and German bond yields. With polling data only available for the first round of the election, Manthey emphasized that the situation would become clearer after the final results on Sunday.The current investor sentiment in Europe has seen a shift, with international investors moving away from the US towards Europe. However, the recent political uncertainties have led to a neutral positioning, particularly in European banks. Despite European stocks trading at a considerable discount compared to US stocks, the increased political risks in Europe have not acted as a trigger for valuation adjustments. Manthey expressed a concern that if the French election outcome proves to be market-unfriendly, it could have ripple effects across European markets due to their high correlation.In summary, the French parliamentary election has introduced unpriced risks that could impact European stocks significantly. The potential scenarios of a far-right or far-left majority in the French Parliament present uncertainties for investors and highlight the importance of closely monitoring the election outcomes and their implications for the broader European market.
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