Far-Right Victory in France Brings Political Uncertainty
EU-China Conflict Forecasts Earnings Cloud
In the French general election, the far-right National Rally (RN) emerged victorious, casting a shadow over European corporate earnings due to political uncertainty and trade tensions between the European Union (EU) and China, major foreign media reported on the 1st (local time).
With the European Central Bank (ECB) cutting interest rates and economic outlooks improving, investor interest in European stock markets had increased. However, the market sentiment changed after French President Emmanuel Macron took a gamble by calling an early general election. Analysts have recently lowered earnings forecasts for French companies and expectations for European stock markets.
On the last trading day before President Macron dissolved the parliament, January 7, the European STOXX600 index hit an all-time high. However, it has since fallen by 2.5%. The French CAC40 index also recorded its lowest level since January.
David Gromen, European equity strategist at Citigroup, said, "Entering the earnings season, some downward revisions may be a typical seasonal pattern, but we are not seeing as many positive signals as in the previous quarter." He added, "The fundamental story looks quite strong, but political risks are coming to the forefront."
In the first round of the French early general election on the 30th of last month, the far-right National Rally (RN) led by Marine Le Pen received 33.2% of the vote, taking first place. The left-wing alliance New Popular Front (NFP) garnered 28%, while the pro-government Ensemble coalition led by President Macron managed only 20%. The far-right also made gains in the earlier European Parliament elections. Since then, investor sentiment has weakened. According to fund data provider EPFR, redemptions from French equity funds recently hit a four-week high.
Strategist Gromen said, "European funds are flowing out due to political risks," adding, "The French general election is a major issue." He cited political risk as the main reason Citigroup recently downgraded its rating on European equities to 'neutral' in its global equity strategy, noting that the market's biggest fear is the potential rise of the left-wing alliance New Popular Front (NFP). He explained that the presence of various parties ranging from the Greens to the far-left and centrists increases instability.
Rising trade tensions between the EU and China also darken the earnings outlook for European companies. After the EU decided to impose tariffs of up to 48% on Chinese electric vehicles, China responded by launching an anti-dumping investigation into EU pork imports.
Nathan Sweeney, Chief Investment Officer (CIO) of Marlborough Multi-Asset, said, "Germany is the largest export economy in Europe, so this is a major long-term problem for Germany." He added that the German automotive and industrial sectors need to be closely monitored.
Mathieu Sabary, Chief European Investment Strategist at BCA Research, said companies need to recognize the heightened uncertainty, adding, "Acknowledging political risks can be positive as it reduces the risk of disappointing earnings in the third and fourth quarters."
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