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Quick view: European elections and French politics

French President Macron has gambled on a snap election as the EU election results fuel turmoil, but what does this mean for European equities? Richard Brown, Client Portfolio Manager, gives a quick insight into some of the views on at Janus Henderson’s European Equities team.

Richard Brown, CFA

Richard Brown, CFA

Client Portfolio Manager

Jun 10, 2024
3 minute read

Key takeaways:

  • The EU election result represents a potentially significant moment for the political status quo in France, representing a setback for Macron’s pro-EU cross-border integration plans.
  • At the time of writing European markets have sold off but not excessively and the euro has softened. But what does this mean?
  • In terms of European equities, this result has taken the gloss off a positive trend thus far in 2024, but we see it as a setback for sentiment, rather than a more fundamental shift in narrative.

The results of the European elections this weekend have created drama in the political landscape in Europe as far-right parties made progress across the continent. Probably the biggest news was the result in France, where President Emmanuel Macron called a snap election after National Rally, headed by Marine Le Pen and Jordan Bardella, won more than twice the votes of Macron’s centrist coalition. The developments in France support the argument for investors needing to navigate political developments carefully in 2024 and why ‘political realignment’ is one of Janus Henderson’s Three drivers for long term investment positioning.

For France, this was a significant moment. Macron’s popularity has been waning for a while, but the scale of the loss prompted his decision, paving the way for early elections. The initial shock will no doubt hang over French risk assets, and particularly domestically oriented stocks, for the next few weeks, if not longer, depending on the election outcome. While France saw the most dramatic shift, it reflected a rise in support for nationalist/protectionist parties across Europe.

Cross-border integration set-back

We see certain consequences to that. The result in France is a setback for the European Union (EU) cross-border integration theme that Macron has championed. This is likely negative for banks, given that expectations for pan-European M&A activity in the industry leading to a more consolidated market will now be tempered. It also represents a setback for Europe’s ability to conceive a continent-wide industrial policy to compete with the billion-dollar reshoring/repatriation ‘self-sufficiency’ strategies from the US and China.

Monetary policy implications

At the time of writing European markets have sold off but not excessively and the euro has softened. While a weaker euro makes it harder for the European Central Bank to cut rates, it will be interesting to see how rate expectations change. In our view, there is still a reasonable likelihood that more monetary policy movement will be on its way following last week’s cut. A weaker currency also might be mildly helpful for European exporters and small-caps. The tidal nature of European politics is also a known factor. The right has won elections before in Europe; yet it has rarely led to a dramatic shift in policy.

For Europe as a whole, we would argue that this probably represents a small de-rating event, taking the gloss off what has been quite a strong narrative thus far for European equities in 2024. The results of the EU parliamentary elections were reasonably in line with polling data leading up to the votes, suggesting that risks were already priced in, to an extent. However, these results could represent a bit of a sentiment hit to the region, with marginal investors reminded of the political risks that had been pushed to the background over the past year.

Narrative remains intact

Europe is also not just a domestic story. The continent is home to a range of global champions that happen to be listed with a European postal address, for which the backdrop looks to be one of recovery alongside the global economy. In summary, we see this as a mild setback for the region but, with the strong valuation argument versus the US remaining, and the global nature of European domiciled businesses, not a major shift in the narrative.

De-rating: The downward adjustment of a company’s financial ratios, such as the price-to-earnings (P/E) ratio, in response to business or market uncertainty. Or, in the case of a bond, lowering the credit rating.

Equity: A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

Reshoring: Transferring business operations that were moved overseas back to the home country.

Small caps: Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.

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