London has reclaimed its position as Europe's largest stock market, overtaking Paris as political uncertainty looms in France. According to Bloomberg, the total market value of stocks listed in the United Kingdom now stands at approximately $3.18 trillion, surpassing France's $3.13 trillion. This shift comes as fears over the outcome of France's upcoming parliamentary elections intensify.
The political landscape in France has become increasingly volatile following President Emmanuel Macron's decision to call snap elections on June 9, a move triggered by his party's poor performance against the far-right in the European Union parliamentary elections. Axel Rudolph, a senior market analyst at IG Group, noted that financial markets are reacting negatively to this uncertainty. "Financial markets don't like uncertainty, and the fact that you've had such a shift to the right in the French European elections has led people to worry about what comes next," Rudolph told CNN.
Since the announcement, the CAC 40, France's benchmark stock index, has declined by more than 5%, erasing approximately $160 billion in market value. Investors are particularly concerned about the potential influence of the far-right National Rally, which could gain significant power in the French parliament. An OpinionWay poll indicates that 32% of voters plan to support the National Rally in the first round of elections on June 30, with left-wing and centrist parties trailing behind.
French banking stocks have been hit hard by the political turmoil. Shares in Société Générale have dropped nearly 14%, while BNP Paribas and Credit Agricole have seen declines of 10.6% and 11.2%, respectively. Hubert de Barochez, a senior market economist at Capital Economics, suggests that investors fear a far-right government might impose additional taxes on banks and other punitive measures. "Generally, quite populist governments attack banks and their proceeds," he said. "There might be fears about additional taxes on banks."
Moreover, French banks hold significant amounts of the country's public debt, which has become riskier as political instability grows. The yields on French government bonds have increased, reflecting higher interest rates demanded by investors. A far-right-dominated parliament could complicate efforts to manage France's substantial government debt, which was 110.6% of GDP at the end of last year.
In contrast, the UK market has shown relative stability. The British financial markets are benefiting from reduced Brexit-related uncertainty and a quick recovery from a brief recession. Investors are finding UK stocks attractive due to their lower valuations compared to US equities. Richard Hunter, head of markets at Interactive Investor, stated, "There are increasing signs that the UK is gaining some favor among overseas investors, given its mix of stable, cash-generative companies which are cheap by comparison."
The UK's political climate appears more stable, with the opposition Labour Party predicted to win the general election scheduled for July 4 by a wide margin. This stability is encouraging investor confidence, contributing to the resurgence of London as Europe's leading financial hub.
In France, the National Rally has proposed increased public spending and tax cuts on essentials like electricity and fuel, measures that could strain the country's finances further. Credit rating agencies are closely monitoring the situation, with S&P recently downgrading France's long-term credit rating. The agency expects the budget deficit to remain above 3% of GDP through 2027, contrary to the current government's target.
Analysts like Mohit Kumar, chief economist for Europe at Jefferies, remain cautious about France's fiscal outlook. "Our view on France remains that yes, we should be worried about the debt and deficit picture," Kumar wrote. "We do not see the French deficit coming below 3% over the next five-year horizon."
