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France’s snap parliamentary election has caused a small but not insignificant rise in political and risk for insurers on several different fronts, which could feed into investment appetites of foreign investors putting money into France, as well as the French domestic market.
This is according to many commentators in the market who have listed possible repercussions from both a far-right and far-left majority. “The risk for France is that the spread on its debt could continue to widen, with some French bonds already yielding more than lower-rated Portuguese paper,” said Allianz Global Investors (Allianz GI) in its paper on the possible outcomes of the election. “We see a risk of large institutional investors turning their back on France’s debt as their local interest rates become more attractive. This could have tectonic implications globally.”
“If a new parliament emerges with a governing majority, we expect a more uncertain economic outlook for the eurozone."
Last week, analysts warned that French stocks could face a poor few months due to the perceived political risks.
“If a new parliament emerges with a governing majority, we expect a more uncertain economic outlook for the eurozone,” said Lombard Odier’s paper on the election from last week. “This would create the greatest risks for other European assets such as eurozone sovereign bonds and the euro. We would expect French equities to continue selling off, especially in the case of a left-wing majority French government.”
The snap elections were called by President Emmanuel Macron after his centrist Renaissance party performed poorly in the European elections in May and came second.
The far-right Rassemblement national (RN) came first with 31.4% of the vote in those elections and are now seen as front-runners for the forthcoming elections.
The election and the likelihood of RN becoming the largest party in the French parliament and taking the prime ministership in what is called ‘cohabitation’ in France’s political model has been said to be a small risk to economic stability and political risk.
“A potential increase in sovereign-related risks could put pressure on some factors that affect insurers’ ratings."
However, many commentators and analysts have said the overall effect will be negligible for the EU’s second largest economy. “The heightened political uncertainty in France created by Macron’s decision to call a snap parliamentary election has not affected French insurers’ ratings,” said a new analysis by Fitch Ratings.
“A potential increase in sovereign-related risks could put pressure on some factors that affect insurers’ ratings, but most insurers should have sufficient rating headroom to absorb the impact given their strong business profiles and capitalisation.”
The added that most French insurers’ ratings “could withstand a significant increase in sovereign-related risks”, up to and including a hypothetical sovereign downgrade.
France’s overall insurance outlook was rated by AM Best as ‘negative’ in May (before the election was called).
The non-life insurance segment had the ‘negative’ outlook maintained with factors considered including:
· A modest level of real top-line growth on an inflation-adjusted basis
· Inflation impact on profitability in light of strong competition
· Volatility sustained by the upsurge in social unrest and climate-related hazards
France’s life insurance segment was also maintained ‘negative’ in outlook on France's life insurance segment. Factors considered included:
· High interest rates and inflation continue to weigh on top-line growth
· Constrained margins tied to lagging investment returns
· Growing product mix diversification despite some set-backs
French business has urged for the rhetoric to be lowered and to “calm down” over the prospect of political change on any effects from results.
The French chief executive of Europe’s biggest stock exchange group, Stéphane Boujnah, was quoted in the Financial Times this week with an appeal for business leaders to stay “calm” ahead of the country’s elections, saying neither the far-right party nor a new left-wing alliance would be able to enact their policy pledges.
In the wider picture of France’s economy, though, which could be brought to the forefront by the election, last week, the European Commission issued a reprimand to France for breaking EU fiscal rules before an election where the frontrunners are making lavish spending promises amid what it called “excessive deficit procedure”.
France has a larger budget deficit than the euro area average and has lagged behind other countries over the last decade in generating growth. On IMF projections, GDP per capita is projected to lag the US and Germany over the coming five years, said Allianz GI.
Some of those promises include the left-bloc’s promises to return to a lower retirement age, which could affect some economic growth.
“Investors and ratings agencies have raised concern about RN's policies such as a pledge to cut value-added tax on energy from 20% to 5.5%.”
France, which has seen its pension funds become massive players in driving ESG-related divestments and sustainable finance promises of some groups, could also see change.
In its round-up of policies Carbon Brief said RN has previously called the EU Green Deal a tool of “punitive ecology” and has pledged to dismantle it, Clean Energy Wire noted. If it gains a majority in the upcoming election, it could “unravel progress in the energy and climate policies of the EU’s second largest economy and weaken ambitions at a critical point in time”, the outlet added.
Reuters said in its update on French business reaction to the prospect of an RN victory that “Investors and ratings agencies have raised concern about RN's policies such as a pledge to cut value-added tax on energy from 20% to 5.5%”, which could change appetite for French government bonds.
We won’t know the result of the election until early July when the second round of votes are counted, and the seats are assigned in the French parliament. What we do know is that the frontrunners, RN, are Eurosceptic and will likely see opposition to any policies from civil society, which could spook investors and raise risk.
“Investors should expect a higher risk premium and market volatility, which could potentially extend across the wider euro zone if France’s problems escalate."
Political unrest is likely, which could affect parts of the economy. There is also the prospect of Macron and the RN-controlled parliament unable to work together seeing little movement on any policy, which could drive malaise in the economy as a side effect.
“Investors should expect a higher risk premium and market volatility in France, which could potentially extend across the wider euro zone if France’s problems escalate,” said Allianz GI.
