Despite French political turmoil being initially viewed by the market as the biggest threat to domestic companies, domestically-oriented stocks have unexpectedly emerged as the biggest winners. Meanwhile, export-oriented companies are struggling due to factors such as the threat of US tariffs and a stronger euro.
Since French President Emmanuel Macron announced snap elections in June 2024, a basket of sectors related to the French economy compiled by Goldman Sachs has surged over 30%. This performance not only significantly outpaces the 2.8% gain of France's blue-chip CAC 40 index but also beats the European Stoxx 600 index.
Macron's election decision triggered sustained political uncertainty, with France seeing four prime ministers in less than two years, a period during which few were optimistic about domestic stocks. The market had widely expected that banking, utilities, and telecom sectors would likely underperform, while the resilient global economic recovery would benefit export-oriented firms like LVMH and Sanofi.
However, an index of overseas-related sectors compiled by Goldman Sachs over the same period has fallen by 10%. Emmanuel Cau, a strategist at Barclays, stated, "Investors who expected a rebound in European export stocks by 2026 may need to reassess their investment strategies carefully. The market anticipated a rotation from domestic to export stocks, but this shift has yet to materialize."
This preference for European domestic stocks is not unique to France. Since the end of 2024, the euro has appreciated by 14% against the US dollar, diminishing the value of exporters' overseas businesses and significantly reducing their appeal. In contrast, domestic stocks have benefited from a low-interest-rate environment and government large-scale fiscal spending plans.
Juxtaposed with this, trade uncertainties stemming from volatile US policies have further dampened the performance of export stocks. French consumer stocks, which account for about 24% of the CAC 40 index's weighting, have also been dragged down by their weak performance in the Chinese market—a core market for luxury giants like LVMH and Hermès.
LVMH's weaker-than-expected results released last week have further fueled market skepticism about the luxury sector's recovery prospects, with particular pessimism surrounding the performance of leather goods and spirits categories. Barclays' Cau added that a weaker US dollar has created opportunities for American investors to allocate funds to emerging markets and Europe, a trend clearly reflected in flow data.
"The rally in European bank stocks is a prime example; these are highly attractive domestic stock choices for US investors." A significant shortcoming of the CAC 40 index is that its constituents generate only 16% of their revenue domestically. This characteristic not only deters investors but has also widened the valuation gap between the index and other eurozone markets to historically high levels, excluding the immediate post-pandemic period.
On a broader level, the French stock market has recently fallen out of favor with investors. A January European fund manager survey by Bank of America revealed that France is currently the least favored stock market among investors over the past four months.
The formal approval of France's budget bill on Monday evening marked the end of this turbulent political phase, validating the market's investment bets on domestic stocks. However, some investors remain cautious.
François Dossou, Head of Equities at Sienna Gestion, which manages the Sienna Action France fund, said, "It would be a serious misjudgment to think that political risk in France is behind us; that is absolutely not the case. Visibility into the future market will not improve, and based on this, we believe maintaining a balanced asset allocation is the wisest choice."
Nonetheless, Dossou remains optimistic about opportunities in domestic stocks: "Germany's economic stimulus plan is expected to boost economic activity across Europe, and we are monitoring potential beneficiaries like Spie. The European telecom sector has M&A potential, and we remain positive on this area; we are also positioning in sovereign industrial themes like defense."
Concurrently, the key gauge of French political risk—the spread between French and German 10-year government bond yields—has narrowed by approximately 20 basis points in just three months, indicating the market had already priced in a resolution to the French budget impasse.
If this spread narrows further to its pre-crisis level of 40-50 basis points, it would provide additional support for the continued outperformance of French domestic stocks. Mislav Matejka, a strategist at J.P. Morgan, noted that the relative performance of French equities has been weak for some time, with even bank stocks lagging, but this dynamic could change in 2026.
He wrote in a research note, "Although uncertainty remains in the French political landscape, the situation may improve this year. We believe investors can use any market pullbacks as opportunities to buy French stocks at lower levels."
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