Une impasse

Investors are still processing the unexpected result of France’s parliamentary elections. Marine Le Pen’s National Rally party had been forecast to win a majority following a successful first round, but Sunday’s second-round result saw tactical dropouts help the left-wing New Popular Front narrowly secure the highest number of seats in the French National Assembly, ahead of the centrist Ensemble alliance.  

A majority in the French parliament requires a minimum of 289 seats (out of a possible 577) and the result of the vote is that three blocs of near-equal size now make up a hung parliament, with no one group able to govern alone. 

If it’s not all left, will it be alright? 

For Audrey Beadle, fixed income investment specialist at Federated Hermes Limited, the fact that no extremist parties gained outright power is a silver lining, but the situation remains volatile ahead of the 2027 French presidential election. 

“There is currently no obvious coalition in sight, and we will now likely enter a prolonged period of political instability and policy opacity,” she says, adding that the fiscal deficit and September’s budget remain key concerns for investors. 

“French President Emmanuel Macron needs to appoint a new prime minister in the short term but it’s difficult to see how France can make the budget cuts needed to get its deficit under control. It is becoming increasingly likely that French debt will be downgraded again,” she adds. 

Despite the uncertainty, market reaction has been muted, says Lewis Grant, senior portfolio manager for global equities at Federated Hermes Limited, adding that a “relief rally” followed the first round of the election.

“Any hope that the worst has been avoided does not automatically translate to optimism for the future, and investors may now be in ‘wait and see’ mode. Expectations that the can has been kicked down the road until the presidential elections are wishful thinking,” Grant warns. 

“The job now is to form a government focused on the few policies the different groups have in common. It might be that disdain for National Rally is enough to see the centre and left combine for a shaky coalition, but we expect any such government to be pushed to its limits by domestic reform, and foreign policy challenges. Any question of sending voters back to the polls will create volatility, which we will have a negative effect on the euro, stocks, and bonds.” 

Filippo Maria Alloatti, head of financials for credit at Federated Hermes Limited, points out that financial groups had already priced out the risk premia for this event. “The path of least resistance is a little wider in the short term, at least while the outcome of what happens next remains unclear,” he says.

“Given the well-documented volume of French debt, a challenging fiscal position with no scope for improvement over the coming year and the growth in parties on the fringes, French paper is likely to underperform. However, an immediate wider blowout is unlikely,” he adds.