In a research note dated October 26, JPMorgan pointed out that although France's political situation and fiscal outlook still face considerable uncertainty, market pessimism has already become fairly pronounced, and some French stocks could see a short-term rebound.
The firm believes that the CAC 40 index has consistently underperformed other markets over the past three years, and its relative price-to-earnings ratio has fallen to a historical low, providing some room for valuation repair.
However, JPMorgan does not believe French stocks yet have the conditions for a sustained rally, and expects investors to remain cautious on French assets until the major political risks subside. Over the medium term, the firm continues to favor stocks with high exposure to business outside France.
French Fiscal and Political Risks Persist, With Little Near-Term Improvement Expected
The team led by JPMorgan strategist Mislav Matejka noted that France's current political environment remains severe, and the government needs to make difficult fiscal decisions to stabilize the budget deficit.
But before the presidential and parliamentary elections scheduled between April and June 2027, substantive progress on fiscal consolidation is unlikely, and the fiscal situation could even deteriorate further in the meantime.
The firm also worries that even after the elections end, a new government may not necessarily have the political conditions to implement the necessary fiscal tightening measures.
Because French political parties are deeply divided, election results may not produce a stable governing majority, and fiscal reform could still face resistance.
JPMorgan specifically noted that France's current situation may not replicate the market performance seen in Italy after the 2022 elections. Even if political uncertainty declines after the elections, that does not mean the government will be able to quickly improve its fiscal position.
Market Pessimism May Be Excessive, Leaving Room for a Short-Term Rebound in French Stocks
Despite the still-prominent political risks, JPMorgan believes the market's judgment on France's outlook may already be overly pessimistic.
The firm noted that the CAC 40 index has continued to underperform over the past three years, and its price-to-earnings ratio relative to other markets has fallen to the lowest level in history.
At the same time, France may pass a new budget bill in the next one to two months. Although this progress would not be enough to fundamentally reverse the fiscal situation, it could still have a somewhat positive effect on market sentiment.
On the political front, current polls show strong support for France's far right, and attention is also focused on a scenario in which far-left and far-right candidates face off in the second round of the presidential election.
However, JPMorgan believes the market may have priced in an excessively negative political outcome, while there is still a possibility that centrist forces could put forward a candidate capable of building coalitions.
From a sector perspective, companies with a high proportion of domestic French business as well as bank stocks had clearly underperformed the broader market, and if political news improves, related shares could see a short-term recovery.
But JPMorgan also cautioned that these stocks are not yet cheap enough to be highly attractive, and their valuations do not fully reflect the risk that French government bond spreads have widened to historical highs.
In addition, corporate earnings expectations have not yet factored in an especially pessimistic French economic scenario, so there is still room for further downward revisions.
Continued Preference for French Listed Companies With High Overseas Revenue Exposure
JPMorgan believes that French political risks have not yet faded, and investors may not continue to increase their investment exposure to France's domestic economy.
Therefore, over the medium term, the firm still prefers to overweight stocks with high exposure to business outside France and underweight stocks with high exposure to domestic French business.
Among these, one category worth watching is companies listed on the CAC 40 index that derive more than 75% of their revenue from markets outside France.
JPMorgan pointed out that a clear divergence has already emerged between share price performance and earnings performance for these companies.
Although the market has pushed down valuations of related stocks because of broader French political risk, most of these companies' revenue comes from overseas, and their operations are not necessarily directly affected by weakness in France's domestic economy.
The firm believes that under most possible economic scenarios, earnings for these companies are unlikely to deteriorate severely, so there is room for the gap between share price and earnings performance to narrow.
By contrast, although domestic French banks and other businesses highly dependent on the domestic economy may see technical rebounds, they still directly face risks such as fiscal tightening, slower economic growth and volatility in the government bond market.
French Risks Are Not Expected to Spread Across Europe, While Iran Tensions Add Another Disturbance
JPMorgan believes that France's political and fiscal risks are unlikely to trigger a broader European financial crisis.
Compared with the period of the European debt crisis, the financial condition of Europe's banking system has improved markedly, credit default levels remain low, and the European Central Bank can also provide more credible support to financial markets.
Therefore, the firm expects that continued pressure in the French government bond market will not necessarily evolve into a systemic risk for the entire eurozone.
In addition, JPMorgan also noted that a possible renewed military conflict between the United States and Iran is another uncertainty facing the market recently.
Some market participants interpret the peak in U.S. and German government bond yields as a signal that global macroeconomic risk appetite has begun to decline persistently, but JPMorgan believes this risk-averse trend may not necessarily continue.
Overall, JPMorgan's view on French stocks is relatively clear: extremely pessimistic market sentiment may create short-term rebound opportunities, but political risks and the difficulty of fiscal consolidation will still limit the room for sustained gains. Before the main uncertainties fade, the firm favors listed companies with a relatively high share of overseas revenue and relatively less exposure to France's domestic political and economic environment.
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