Goldman says French stocks face worse political risks

Markets were immediately spooked by the prospect of the far-right National Rally party winning the legislative elections on June 30 and July 7, the prospect of populist fiscal policy, measures targeting banks, and a “Les Truss-style financial crisis.”

Along with the equity sell-off, borrowing costs rose and the spread between French and German 10-year bond yields widened by 25 basis points.

Goldman strategists expect this spread to remain wide in the coming weeks.

“This is likely to continue pressure on French domestic stocks, especially banks, which are highly sensitive to sovereign spreads,” Goldman Sachs strategists said in a research note published on Friday.

Big French local names include supermarket chain Carrefour, construction company Vinci and utility Engie, while internationally-minded giants include the likes of LVMH, L’Oréal and Rémy Cointreau.

In the short term, Goldman advises looking to defensive sectors such as healthcare amid rising political uncertainty.

The investment bank said a National Rally win would likely weigh more heavily on French domestic stocks, although in the long term the party may prove more business-friendly than expected if it remains focused on ensuring the candidate wins the 2027 presidential election.

He added that there was also the possibility of a hung parliament and political gridlock, which would “reduce the potential for market backlash” but be consistent with broader sovereign spreads, which would persistently weigh on identified domestic shorted stocks.

The CAC 40 as a whole has only about 20% French exposure, according to Sharon Bell, chief equity strategist at Goldman.

“Now, this is not zero French exposure, and obviously people are adding an additional risk premium to France right now given the upcoming election,” Bell told CNBC’s “Squawk Box Europe” on Monday.

“This market has done well in recent years as well, with some companies enjoying very high appreciation… 80% outside France, many of them earning in dollars,” she added.

“I think the selling of all French stocks was a knee-jerk reaction, and we see the most at risk as small caps and local French names.”

She added that from a broader perspective, the high perception of political risk in Europe contributes to the region’s assessment gap with the United States.

“When I talk to global clients – clients in Asia and the United States – about investing in Europe, the first thing that comes to mind is political risk… I certainly think that the gap between Europe and the United States will not close, and may even narrow a little bit and that is,” Bell said. “Our view is, but it will not close because of some of those risks.”