investment insights

    Elections: down and out in Paris and London

    Elections: down and out in Paris and London
    Dr. Luca Bindelli - Head of Investment Strategy

    Dr. Luca Bindelli

    Head of Investment Strategy
    Bill Papadakis - Senior Macro Strategist

    Bill Papadakis

    Senior Macro Strategist

    Key takeaways

    • The UK elected a Labour government with a clear majority. The new administration is prioritising growth and gradual change rather than quick shifts in fiscal policy
    • France’s second-round vote creates political deadlock as a left-wing alliance won the most seats, but no majority
    • Without a clear governing majority, there is little likelihood that France can address its fiscal deficit challenges in the near term
    • We still like German Bunds and European corporate credit (hedged against the portfolio reference currency), and prefer UK stocks to European equities.

    Parliamentary elections on both sides of the Channel have delivered a decisive majority to the UK’s Labour Party and a divided French parliament, where a left-wing alliance surprised by winning most seats. Financial markets gained a little in London, and staged a limited ‘relief rally’ in Paris. We prefer German Bunds to US Treasuries, European to US credit (USD-hedged), and UK to European (EMU1) stocks.

    The new UK administration should provide the country with more predictable policymaking thanks to the government’s large parliamentary majority. The Labour Party has taken care to present itself as fiscally prudent; Rachel Reeves, the new Chancellor of the Exchequer and a former economist at the Bank of England (BoE), has said the government wants to focus more on growth than changes to taxation. The Labour manifesto pointed to gradual rather than radical changes in fiscal policy, including improvements in public services and a boost to housebuilding via planning system reform, while excluding large tax hikes. The new government is also expected to work to improve relations with the European Union.

    In contrast, France’s 7 July vote delivered a hung parliament, as forecast, but not the victory that markets anticipated for the far right ‘Rassemblement National’ (RN). Instead, the RN was beaten into third place, behind a broad left-wing alliance and a centrist grouping, following coordination to block the far-right from power. The result leaves the left’s ‘Nouveau Front Populaire’ (NFP, or New Popular Front) with the most seats but far short of an absolute majority, and French domestic legislature paralysed between three main groupings. The country faces a period of political bargaining with left and centre parties looking to identify a mutually acceptable prime minister, and a minimal legislative agenda. Longer term, a three-way split that the electoral system was designed to avoid may result in another vote a year from now once it can be called. In the meantime, the outcome complicates Emmanuel Macron’s remaining presidential mandate, which ends in April 2027.

    The outcome complicates Emmanuel Macron’s remaining presidential mandate, which ends in April 2027

    No deficit appetite

    With gridlock at the domestic policymaking level, there is unlikely to be any consensus over the need to address the country’s deficit. France’s long-term credit outlook was downgraded by S&P Global last month; the rating agency cited public debt, slow economic growth, and political deadlock as complications that would undermine efforts to address fiscal issues. France’s budget deficit was equivalent to 5.5% of its gross domestic product (GDP) in 2023. While it is expected to fall to 5.3% this year, it has already been criticised by the European Commission for breaching the euro area’s 3% ceiling. The EU’s ‘excessive deficit procedure’ is designed to call a government to account, and explain how it will reduce spending. It was suspended during the pandemic.


    Preferred paper

    How will European and UK assets respond to a changing political backdrop – and how should we position portfolios with politics, economics, and market dynamics in mind?

    Our global portfolio positioning remains well balanced between equity and bond allocations, with neutral exposures to risk assets. Growth dynamics remain moderately supportive, despite recent signs of slowing activity, and central banks are easing monetary policy. However, the political context will remain challenging in the second half of the year, and may trigger episodes of market volatility.

    In sovereign bonds, we prefer five- to seven-year German Bunds over US Treasuries, hedged against the portfolio reference currency. The European Central Bank is likely to remain ahead of the Federal Reserve in its interest rate cutting cycle and will probably reduce borrowing costs further. Bunds also stand to benefit from investor demand for haven assets and portfolio diversification amid political and geopolitical uncertainties. We expect the spread between French 10-year Obligations Assimilables du Trésor (OATs) and Bunds to remain higher than pre-election levels, given fiscal deficit challenges.

    We prefer five- to seven-year German Bunds over US Treasuries

    In corporate fixed income, we prefer European investment grade and high yield credit over US dollar-denominated equivalents, as the former offer attractive yields on a US dollar-hedged basis. Not only do we see better value in euro-denominated bonds, but adding a dollar hedge helps offset lower yield levels in the eurozone and gain exposure to our preferred currency. In European corporate credit, we believe financials’ bonds could now offer some catch-up potential.


    Contrasting stock preferences

    While French stocks, financials in particular, have recovered in line with our expectations, we do not anticipate much upside from here, as political uncertainties remain. More broadly, Europe is still our least preferred region. Economic growth is improving but remains below-trend, translating into a weaker earnings outlook. European car makers face a tough competitive landscape and look vulnerable to escalating tariffs and trade wars. The fall in the euro and/or European interest rates could improve the outlook for European equities, but for now we hold them at underweight levels versus our strategic benchmark in client portfolios.

    Europe is still our least preferred region for equities

    Conversely, UK stocks remain our preferred equity region. The economic backdrop is improving, with both sterling and interest rates likely to fall. The FTSE 100 index’s many multinational firms should also benefit from a weaker outlook for sterling, as the BoE’s rate-cutting cycle kicks-off this summer. Equity valuations are attractive compared to other regions. In addition, many investors are still largely underweight UK stocks. Potential reforms may push UK defined contribution pension plans to boost their holdings of domestic equities, providing additional support to the equity market.

    Currency markets will also continue to reflect political dynamics. We expect investor demand for the dollar to rise as the US elections near, driving EURUSD from 1.08 today towards 1.04 three months from now. Sterling has held steady in the run-up to and following Labour’s victory. We expect BoE policy easing from August to matter more for the currency in the months ahead, driving GBPUSD lower, to 1.25 in three months’ time, and 1.22 in twelve months, from 1.28 today.


    1 Economic and Monetary Union

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