France election: What the left's win means for the economy and luxury sector

With no party winning an outright majority, the election has thrown the economy into uncertainty.

Wendy

Shawn Chen

, and

Yiding Xing

Jul 12, 2024

French voters delivered a surprise by handing a win to a left-wing coalition and relegating the far-right to third place. With no party winning an outright majority, the election has thrown the economy into uncertainty.

"The New Triumvirate of French Politics”

In 2024 French legislative election, the competition is primarily among three political factions.

In the 2024 French legislative election, the competition is primarily among three political factions.

The far-right "National Rally" (RN), led by Marine Le Pen, mainly advocates for trade protectionism and economic nationalism. They propose reducing France's contributions to the EU, raising tariffs to protect French industries, and offering tax cuts for families and businesses to lessen foreign influence on the French economy.
he centrist alliance (ENS) led by the incumbent President Emmanuel Macron promotes market-friendly reforms to boost economic growth and reduce public debt. Their policies include labour market liberalisation, business tax incentives, and encouraging innovation and digital transformation.
The New Popular Front (NFP) led by Jean-Luc Mélenchon emphasises increasing social spending and wealth redistribution. They focus on higher taxes on the wealthy, nationalising key industries, and making substantial investments in green energy and public services. Their policies focus on reducing economic inequality and addressing climate change through significant public investment.

The New Popular Front (NFP), which had finished second in the first round of parliamentary elections, surprisingly won the first place in the second round on July 7th. Over the two rounds, they secured a total of 182 seats in the National Assembly. The ruling Renaissance Party and its centrist alliance together held 168 seats, the far-right "National Rally" obtained 143 seats, the right-wing Republican Party secured 60 seats, and other parties took the remaining 24 seats. However, the NFP fell short of the 289 seats needed to secure a majority, which has resulted in a "tripartite division" of French politics, further exacerbating an already fragmented political landscape.

The last time France experienced a "hung parliament" was in 1997, when the center-right President Jacques Chirac had to cooperate with the left-wing Prime Minister Lionel Jospin. This political arrangement often required substantial political compromise and negotiation to pass legislative proposals. Similarly, President Macron may need to seek allies from the left-wing coalition to avoid a more severe political deadlock and to navigate the challenges of implementing significant reforms.

French Government Faces Ongoing Debt & Deficit Challenges

As of 2024, France faces significant challenges with its public debt and deficit levels. Last year, the French public deficit has sharply widened to 5.5% of GDP in 2023, up from 4.8% in 2022, experiencing negative growth after the end of the COVID-19 pandemic. France's public debt is currently at 110.6% of GDP, a slight decrease from 111.9% in 2022 but still significantly higher than pre-pandemic levels, around 97.9% of GDP.

The primary reasons for France's continued fiscal deterioration in recent years are sluggish economic growth, lower-than-expected tax revenues, and persistently increasing public expenditures. In contrast, the EU's Stability and Growth Pact (SGP) fiscal rules require member states to keep budget deficits below 3% of GDP and public debt below 60%. France's current economic figures far exceed these thresholds. The European Commission has highlighted the potential conflict with EU fiscal rules in its response to France's 2024 budget plan and emphasized the risk of negative adjustments by global rating agencies. And S&P Global Ratings already downgraded France from AA to AA- last month. According to the latest World Economic Outlook published by the International Monetary Fund (IMF), France is expected to drop out of the world's Top 10 economies within five years due to slowing economic growth.

How France’s election affect the financial market?

Bond Market:

The yield on French 10-year government bonds surged past 3.3% amid mounting concerns over the nation’s finances after President Emmanuel Macron called a snap election. Recently, the yield remains volatile and continues to trend upwards. The looming political gridlock are likely to push France's 10-year bond yields higher, further widening the spread with safer Germany’s benchmark bond yields.

Stock Market:

Since President Macron call snap election on June 9th, the French stocks markets have experienced significant volatility. Over the past month, the CAC 40 index has dropped by 4%, wiping out over 200 billion euros in market value and losing its position as Europe's most valuable stock market to the UK🇬🇧.

Notably, french luxury stocks fall as tax concerns rise after snap election. Over the past month, the shares of the four largest companies in the luxury sector have fallen: LVMH by 7.8%, Hermès by 3.56%, L'Oréal by 11.36%, and Kering by 1.64% (as of July 10).

French luxury stocks fall as wealth tax concerns rise after left-wing election success. Three of the sector’s largest companies each traded in negative territory as market sentiment weakened.

Hermes International SA (OTCPK: HESAF) down 0.7%
LVMH – Moët Hennessy Louis Vuitton (OTCPK: LVMUY) down 1.6%
Kering SA (OTCPK: PPRUY) down 2%

Risks Facing the Luxury Sector and Reliance on International Markets:

Political turmoil in France is affecting the luxury goods sector. France dominates the luxury market, with 130 of the world's 270 luxury brands originating from the country. While the luxury sector only accounts for 1.7% of France's GDP, its economic impact is significant and growing rapidly. Last year, LVMH alone accounted for 4% of France's exports, surpassing French wine.

The high wealth tax proposed by the winning left-wing parties is expected to further affect the wealthy and weaken the luxury market. This could lead to a decrease in domestic demand for luxury goods, changing market dynamics, and impacting the profits of major luxury companies like LVMH and Hermès. Facing these challenges in the domestic market, French luxury companies are likely to rely more on international markets, particularly emerging markets such as China, India, and the Middle East. It's important to note that for most French luxury companies, France represents a fraction of overall sales.

Currency Risk:

We see EUR/USD upside capped in the near term. The hung parliament with the National Assembly divided into three distinct blocs means that internal and external policy negotiations will become more intense, making consensus harder to achieve. Combined with the risk of worsening French debt, the euro may remain under pressure in the future.

Future Outlook:

Political instability and strained fiscal position in France is causing market volatility. The luxury goods market is also at risk.

Given the upcoming elections in the US and Europe, political uncertainty is expected to bring a weaker risk appetite in the third quarter. In the fourth quarter, after the core European elections and the US presidential election, market sentiment will return to economic fundamentals.

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