Editors’ Note: MarketMinder Europe favours no politician nor any party. We assess political developments for their potential economic and market impact only.
France’s legislative elections delivered a major shift Sunday, but not the one political analysts we follow forecasted. Entering the weekend’s second-round vote, most observers anticipated President Emmanuel Macron’s Together! movement would lose its majority, and they did.[i] But the biggest beneficiary of Macron’s collapse wasn’t the leftist alliance known as Nupes (short for New Popular Union), which won the second-most seats but badly underperformed polling projections.[ii] Rather, Marine Le Pen’s National Rally—a nationalist party with a leftist economic platform—surprised observers by jumping from 8 seats to 89.[iii] Le Pen’s ascendance as the second-largest single party in the National Assembly has garnered attention from publications we follow in the days since, with most commentators foreseeing chaos and deadlock dooming Macron’s reform agenda. In our view, they are merely putting a colourful, hyperbolic spin on traditional political gridlock, which we think stocks will likely be just fine with once the uncertainty weighing on markets globally eventually starts clearing.
It takes 289 seats to win a majority in the 577-seat National Assembly, and most polls projected Macron’s bloc would get close. But in the end, they got just 245, followed by 131 for the Nupes, then the National Rally’s 89 and finally the centre-right Republicans’ 61.[iv] But even this is more fragmented than it looks, as the Nupes isn’t a party—it is an alliance of the green, centre-left and far-left parties.[v] The four participating parties agreed to field only one candidate for each seat, with candidates running under the alliance’s umbrella instead of their actual party.[vi] That alliance is already crumbling, with the participating parties shying away from leftist leader Jean-Luc Mélenchon’s desire to make the bloc a formal coalition in the assembly. Doing so could risk wiping out their parties’ identities and subsuming them into Mélenchon’s France Unbowed, which won the most seats amongst the four.[vii] That is probably a particular anathema to the centre-left Socialist Party, which has been fighting hard against its own obsolescence since 2017, when Socialist presidential incumbent François Hollande didn’t even bother seeking re-election.[viii] So, we think we will most likely see the Nupes splinter into four, with France Unbowed reportedly taking about 70 seats, followed by the Socialists, Greens and Communists.[ix]
That is consequential for a few reasons, in our view. One, it fragments the leftist opposition, theoretically freeing up the Socialists to vote with Macron’s party on issues they have in common. Two, it leaves the National Rally firmly in second. Traditionally, the second-largest party in the National Assembly gets to chair the finance commission, a post that would theoretically go to the Nupes if they form an official bloc.[x] But we think the Nupes’ splintering looks likely to deliver the post to Le Pen’s party. Should that happen, it will give the National Rally’s economic agenda a bigger platform, but platform and policy dictation are two very different things. Le Pen’s economic wish list may overlap to an extent with Mélenchon’s (both favour higher public spending, bigger deficits and more state control in certain economic sectors, and both oppose Macron’s proposed pension reforms), but their combined power is still less than 289 seats.[xi] They may be a noisy opposition, but they are the opposition nonetheless.
As for where this leaves Macron, gridlocked pretty much sums it up, in our view. The Republicans may have numerous policy overlaps with Together!, especially on the economic front, but party leader Christian Jacob said he has no plans to join a formal coalition.[xii] Therefore, Macron’s bloc will likely have to form a minority government and do a lot of negotiating to win a confidence vote for its cabinet and prime minister. If negotiations don’t bear fruit, Macron has the power to dissolve the assembly and call a snap election, but voters’ apparent frustration renders that unlikely at the moment. In our view, it seems more probable that the other parties will use their leverage to the max, gain as many concessions as they can, and then move on. From there, presuming a cabinet gets confirmed, actual governing will likely mean reaching out to the Republicans for support on some measures and the Socialists or even the Greens on others, especially with nuclear power issues front and centre right now. Some proposals might squeak through, some will probably get watered down, and some will probably die on the vine. More urgent items, like addressing the issues causing Électricité de France’s nuclear power facilities to run well below capacity—risking rolling blackouts later this year—probably have a higher likelihood of passing than more contentious items like pension reform.[xiii]
Depending on your personal preferences and views of France’s economic competitiveness, you might find this to be bad or good news. But in our experience, even well-intended reforms risk creating winners and losers, with often unforeseen downstream consequences. According to our research, when stocks are familiar with the status quo, even if people think that status quo isn’t great, it is often a better the devil you know-type situation. With change comes uncertainty, and our research shows that uncertainty can weigh on stocks. We think a gridlocked government, however noisy, reduces that uncertainty, which, in our view, enables more risk-taking and investment. The benefits may not be immediately clear whilst global stocks remain mired in a very tough stretch, but we think they are likely to materialise as time rolls on.[xiv]
[i] Source: French Ministry of the Interior, as of 22/6/2022.
[v] “Jean-Luc Melenchon and NUPES Seek Majority in France,” Andreas Noll, Deutsche Welle, 18/6/2022.
[vii] “Macron’s Centrist Grouping Loses Absolute Majority in Parliament,” Angelique Chrisafis,” The Guardian, 20/6/2022.
[viii] “France Presidency: Francois Hollande Decides Not to Run Again,” Staff, BBC News, 1/12/2016 and “Are Traditional Political Parties Dead in France?,” Aurelien Breeden and Constant Méheut, The New York Times, 28/4/2022. Accessed through the Internet Archive.
[ix] “Macron’s Centrist Grouping Loses Absolute Majority in Parliament,” Angelique Chrisafis,” The Guardian, 20/6/2022.
[x] “Budgeting in France,” Delphine Moretti and Dirk Kraan, OECD, 2018.
[xi] “Jean-Luc Mélenchon, the Rabble-Rouser Leading the New French Left,” Clea Caulcutt, Politico, 23/5/2022, and “Marine Le Pen’s Far-Right Vision: Retooling France at Home, Abroad,” Elaine Ganley, Associated Press, 23/4/2022.
[xii] “French Election: Macron Seeks Allies to Prop Up Minority Government,” Staff, Deutsche Welle, 21/6/2022.
[xiii] “French Nuclear Power Crisis Frustrates Europe’s Push to Quit Russian Energy,” Liz Alderman, The New York Times, 19/6/2022. Accessed through the Internet Archive.
[xiv] Source: FactSet, as of 22/6/2022. Statement based on MSCI World Index return with net dividends in GBP, 31/12/2021 – 21/6/2022.
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