France's stock market is emerging as a core target for capital avoidance across Europe and globally, with persistently elevated political risk driving short-selling sentiment ever higher.
According to strategists at Barclays, both systematic funds and actively managed funds are sharply reducing their exposure to France's CAC 40 index, with trend-following funds (CTAs) having pushed French equities into the largest short position among both European and US markets.
Meanwhile, a fund manager survey released by Bank of America last week showed that France has become the least popular stock market in Europe, with a net 56% of respondents planning to underweight French assets over the next 12 months — the highest reading on record.
The CAC 40's annual performance gap relative to the European STOXX 600 this year is on track to be the widest since 2010, marking its third consecutive year of underperformance. Against a broader backdrop, France's ongoing political turmoil and debt pressures are pushing risk premiums to new highs, further weighing on market sentiment and valuations.
CTA Funds Short Heavily, France Becomes Largest Short Position
Barclays strategists Rex Feng and Anshul Gupta noted in a research report published this Tuesday that CTA funds are actively reducing European risk exposure while rebuilding long positions in US equities, with French political risk being the core driver. "CTA positioning in EU equities is near flat, but has been taken to maximum short in the CAC index; unlike the US, most European markets have recently seen net inflows," the two strategists wrote.
CTA funds determine long or short directions on index futures through market signals, and their positioning changes often carry a strong trend-amplifying effect. The current concentrated shorting of the CAC 40 by these funds means French equities are unlikely to receive capital support from systematic strategies in the near term, with upside potential clearly constrained.
Political Turmoil and Debt Pressure Push Risk Premiums Higher
The plight of French equities stems from the political instability that has persisted since President Macron announced snap elections in June 2024. Since then, France has gone through four prime ministers, with fiscal deficits and debt levels continuously climbing, driving up government refinancing costs.
Social protests triggered by cost-of-living pressures have escalated into widespread violent clashes, further undermining market confidence. The spread between French 10-year government bonds (OATs) and German bunds — a key gauge of French bond risk — has breached 150 basis points.
Although companies in the CAC 40 derive only about 16% of their revenue from domestic France, the index remains deeply mired in negative sentiment toward the country as a whole. Weakness in consumer stocks is also a clear drag — the sector accounts for roughly 23% of the CAC 40's weighting and includes luxury leaders such as LVMH SE and Hermes International SCA.
Active Managers Withdraw in Tandem, Underweight Sentiment at Historic Extreme
Actively managed investors are also growing increasingly cautious. According to the Bank of America fund manager survey released last week, France ranks first among Europe's least popular stock markets, with a net 56% of respondents saying they plan to underweight French assets over the next 12 months — the highest reading since the survey began.
With both systematic and active funds retreating, the CAC 40 faces dual pressure from capital flows. With the political outlook still uncertain and the path to fiscal consolidation unclear, French equities are unlikely to shed the label of "Europe's least popular market" in the near term.
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