Paris, France – French stocks are facing increased political risk in the coming weeks and months, with the potential for significant impacts on certain sectors, according to analysts at Goldman Sachs. The recent performance of blue-chip stocks on Paris’s CAC 40 index has been concerning, experiencing their worst decline since March 2022 amidst the uncertainty surrounding the surprise announcement of a snap election.

Investors were rattled by the looming legislative elections and the possibility of a far-right victory, which could lead to populist fiscal policies and measures targeting banks. This has translated into a sell-off in equities, driving up borrowing costs and widening the spread between French and German 10-year bond yields. Goldman Sachs strategists anticipate this spread to remain wide in the near future, putting pressure on French domestic stocks, particularly those in sensitive sectors like Banks.

The potential victory of the National Rally party has raised concerns among investors, leading Goldman to recommend defensive sectors like health care during this high period of political ambiguity. While a National Rally win may initially harm domestic stocks, there is the possibility that the party could adopt a more business-friendly approach if it focuses on securing a victory in the 2027 presidential election.

Furthermore, the prospect of a hung parliament and political deadlock could mitigate the market reaction in the short term but maintain pressure on specific exposed domestic stocks. Analysts also note that the CAC 40 index is not entirely French-centric, with around 20% exposure to French markets. Despite this, the upcoming election has prompted investors to factor in an additional risk premium for France.

Looking beyond France, a broader perception of political risk in Europe contributes to the region’s valuation gap with the U.S., according to Sharon Bell, senior equity strategist at Goldman Sachs. The ongoing concerns surrounding political stability in Europe have led to discussions among global investors, especially concerning the investment landscape compared to the U.S. While the valuation gap may narrow slightly, the political risks in Europe are expected to keep it from closing entirely.

In conclusion, the evolving political landscape in France poses challenges for investors, with the potential for significant impacts on specific sectors and stocks. As uncertainties persist, market participants are advised to monitor developments closely and consider the implications of political outcomes on their investment strategies.