First Round French Parliamentary Elections: First take on results and investment implications

The first round of legislative elections took place in France on Sunday 30 June 2024 and exit polls/initial results confirm what opinion polls had suggested.

Marine Le Pen’s National Rally (RN) and allies gained the most votes (around 34%), with the far-left New Popular Front (NPF) alliance in second (around 29%) and President Macon’s centrist Ensemble in third (20%).

The first round was to decide which candidates will go forward to the second round in each of 577 constituencies. Only candidates with more than 12.5% of the first-round vote qualify to advance to the second round, and those gaining more than 50% are automatically elected.

Initial seat projections from Ipsos suggest that RN will win 230-280 seats, just short of the 289 needed for a majority. The NPF is expected to gain 125-165 seats and Ensemble is expected to gain 70-100 seats. We would note that such projections are hazardous and uncertain at best. 

It is not clear that any party will gain a parliamentary majority, especially since the President has appealed to the electorate to block the far-right RN. Further, Jean-Luc Mélenchon (leader of the NPF alliance) has asked his candidates who came third in constituencies led by the RN to step down (in order to block the RN, by helping to swing second-round votes in these constituencies to non-RN parties, rather than split the anti-RN vote between centrist and leftist candidates).

The second round takes place on Sunday 7 July and the outcome is far from clear.  In the table below we consider three possible scenarios. A far-right majority, far-left majority, and a temporary administrative solution, such as the nomination of a technocratic government, or alternatively a continuity cabinet of some kind (a government must be formed from the new parliament because there cannot now be another election for at least 12 months).

We suspect the latter solution has the highest probability and believe this would be the most reassuring outcome for financial markets and trigger a bit of a relief rally. Both far-right and far-left governments would likely boost the already large fiscal deficit and would worsen relations with the EU. 

However, the relief may be short-lived, as Marine Le Pen appears to have a good chance of being elected president in mid-2027, supported by a far-right government. Furthermore, if a continuity or technocratic government is stymied by a strong RN or held back in being beholden to the NFP, President Macron may dissolve the National Assembly and call another early election after a year. A scenario being discussed in some political circles. The uncertainty may not be resolved fast.  Of course, a lot can change in three years but for now all eyes are on the second round on 7 July.

Investment implications on the possible outcomes of the French election

Administrative Solution

This is the outcome that would be most positively received by markets. This scenario is likely to result in the most continuity, greatest stability and the least uncertainty, and so French equities are likely to rise in this scenario. This outcome is likely to be the most pro-EU outcome, and so the euro and European equities are also likely to rise.

In addition, French bond yield spreads versus Germany are likely to narrow because this government is likely to be the most fiscally prudent. Likewise, peripheral country spreads are likely to narrow because this outcome would be the least damaging for the EU project.

Far-right Majority

This outcome would not be well received by markets, but it would not be as negative as a far-left majority, especially given the reassurances that Marine Le Pen has given. However, given that it would likely damage the strength of the European Union, the euro would be likely to weaken.

Given the greater political uncertainty, it would likely be negative for French equities and European equities, while French and peripheral country bond yield spreads versus Germany could widen.

Far-left Majority

This outcome would be the most negatively received by markets. It would likely result in the greatest fiscal largesse, causing French bonds to sell off. This would also damage the strength of the European Union, which could weaken the euro.

Given the greater political uncertainty, it would likely be negative for French and European equities, the euro and would cause a widening of French and peripheral bond spreads versus Germany.

Market reaction after the first round has so far been in line with what we would expect in the Administrative Solution scenario, with bond spreads narrowing and French/Eurozone stocks and the euro rising.