Bloomberg: ‘Investment guide’ for the second round of parliamentary elections in France tomorrow

France’s CAC 40 fell this week amid a global stock slump amid fears of a recession. Those who have invested in French stocks have one more thing to worry about this weekend, according to Bloomberg.

In the event that President Emanuel Macron fails to win an absolute majority of seats in the National Assembly in Sunday’s election, he will need support from the center-right to advance his agenda, which includes raising the retirement age and restructuring the electricity company EDF.

This could make investors, who have supported Macron’s pro-business, pro-European policies, less optimistic about French stocks. Instead, banks such as Societe Generale SA and luxury companies, including LVMH, would be boosted if it secured another five years of regulatory scrutiny.

Polls suggest Macron’s party and its allies will win the most seats, but may not be able to garner the 289 required for an absolute majority. The main opposition, a left-wing coalition known as the Nupes, is unlikely to take control of the assembly, according to opinion polls. A surprise victory would shock investors, as these parties are calling for big increases in government spending and taxes, a freeze on prices and government takeovers of some companies.

“The most likely outcome is a relative majority for Macron, which would make governance more difficult, but would not be a drama,” said Philippe Waechter, chief economist at Ostrum Asset Management. “Any surprise victory from the far-left alliance would make investors run.”

The French left wants an economic revolution in the parliamentary elections

Certainly, investors are more focused on inflation and the economy than on elections, said Serge Pizem, head of Axa Investment Managers’ multi-asset division in Paris. A substantial victory for Nope “would indeed be a wave, but a smaller one than the giant wave that is plaguing the markets today,” he said.

The following is a detailed presentation by sector:

Banks

Lenders such as BNP Paribas SA, Societe Generale and Credit Agricole SA will benefit from a Macron majority, as it will mean stability in France’s finances and the continued attraction of foreign investors. Nupes, which includes Jean-Luc Melenchon’s far-left “Unruly France” and the center-left Socialist Party, wants to separate investment banking from retail banking, ban “toxic” derivatives and impose a “significant” tax on financial transactions.

Luxury

Luxury is France’s strong industry and Macron’s first term was good for business, with lower taxes for the rich. LVMH, the owner of Gucci, Kering SA and Hermes International are responsible for the full net rise of CAC 40 since its election in 2017. The fact that his party will retain control in parliament would mean the continuation of a favorable business and tax environment. The Melenchon alliance will raise taxes for the rich.

Energy

The Macron government is considering nationalizing the troubled utility Electricite de France SA and investing heavily in nuclear power, while providing ongoing support to households struggling with rising electricity and gas prices. Nupes wants a way out of nuclear power and would go beyond the nationalization of the EDF, combining the electricity distribution system and other energy operators into one state-owned entity.

Grocery stores, other retailers

Investors expected the consolidation to finally take place among French food retailers after Macron was re-elected in April after the government shut down Canadian confectionery company Alimentation Couche-Tard Inc. from the acquisition of the grocery store Carrefour SA. Macron has also pledged to introduce so-called food stamps to help less affluent people suffering from inflation, which analysts say will benefit both Carrefour and Casino Guichard-Perrachon SA. The Melenchon alliance is proposing a freeze on some commodities, which could lead to a sell-off in food stocks, said Clement Genelot of Bryan Garnier & Co.

The “black swan” event would be an absolute majority for Nupes. There is a 15% chance that this will happen, said John Plassard, CEO of Mirabaud & Cie.

This would cause the CAC 40 index to fall by 20% to 30% in just a few days, said IG France chief market analyst Alexandre Baradez. “It would be very violent,” he said. The Nupes program is “an absolute repulsion for both foreign and domestic investors”.