Recent political unrest in France has rattled financial markets, but Barclays suggests that the worst of the shock could be behind us and investors should consider recent weakness as a buying opportunity.
Prime Minister François Bayrou faces a confidence vote on September 8, just days before crucial budget negotiations and a nationwide protest scheduled for September 10.
With both the far-right Rassemblement National and the left-wing New Popular Front expected to oppose him, Barclays analysts believe there is little chance of Bayrou’s government surviving.
“If Bayrou falls, it seems most likely that President Emmanuel Macron would appoint a new prime minister from his own camp to continue budget work,” Barclays notes.
The bank argues that this scenario would reduce political risk after recent spikes. Alternative outcomes, such as new elections or Macron resigning, would be more disruptive, though they are seen as less probable.
Political uncertainty has already affected French markets. The OAT-Bund spread widened to roughly 80 basis points from 65 earlier in the week, approaching levels last seen during the June 2024 snap election. Credit default swaps also climbed near those highs. French equities suffered, with the CAC 40 down about 3% and Barclays’ domestic basket losing roughly 7%. On a relative basis, MSCI France’s price-to-earnings ratio is once again near its lows.
Barclays highlights three potential paths:
- New prime minister: The OAT-Bund spread could narrow to around 70 basis points, supporting a modest equity rebound.
- New elections: The spread might rise to 90 basis points, potentially knocking 2% to 3% off broader indices.
- Macron resignation: The most disruptive scenario, pushing spreads to 100 basis points and sending domestic stocks sharply lower.
Sector performance shows that domestic-focused areas have been hit hardest. At the current 79-basis-point spread: banks are down 9.2%, construction and materials 8.6%, and insurers 7.6%. Utilities lost 6.3%, industrial transport 5.5%, autos and parts 2.3%, and real estate 2.6%. More defensive or internationally oriented sectors fared better, with health care up 0.2% and technology 0.6%.
Barclays estimates that if spreads narrow, banks could rebound 4.7%, autos 3.2%, and technology 2.7%.
A widening to 90 basis points would worsen losses, with banks down 5.4% and insurers 4%. At 100 basis points, the impact would be severe: banks down 10.5%, autos 7.1%, and insurers 7.7%.
Overall, domestic-focused companies remain most exposed, while exporters, particularly in luxury goods, are less vulnerable to local political shocks.
This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
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