London seizes stock market supremacy from Paris amidst mounting political uncertainty in France.
Total value of stocks listed in France currently stands at approximately $3.13 trillion, slightly less than the $3.18 trillion worth of stocks listed in the United Kingdom, as per a report by Bloomberg. On Tuesday, the CAC All-Share index in Paris was still slightly larger than London's FTSE equivalent, though the latter represents 98% of the market value of UK-listed shares.
The shift in European equity markets, with London regaining its position as the biggest, is largely attributed to the unexpected snap elections called by French President Emmanuel Macron after his party suffered a significant loss to the French far-right in the vote for European Union lawmakers, according to Axel Rudolph, a senior market analyst at the trading platform IG Group.
"Financial markets don't appreciate uncertainty, and the sudden shift to the right in the French European elections has caused worry among investors," Rudolph explained to CNN.
Since the elections, the CAC 40 of leading French stocks has dropped more than 5% in value, amounting to a loss of $160 billion, as investors contemplate the potential increased influence of the far-right National Rally in the parliament of France, the second-largest economy in Europe.
The first round of French elections is set for June 30, followed by a second round on July 7. According to an OpinionWay poll released last Friday, 32% of respondents plan to vote for the National Rally in the first round, compared to 25% for a coalition of left-wing parties and 19% for Macron's centrist party.
French banking stocks have particularly suffered since the elections. Shares in Societe Generale have plummeted by nearly 14%, while shares in BNP Paribas and Credit Agricole have dropped 10.6% and 11.2% respectively. Investors are concerned that a parliament governed by the National Rally might penalize banks and enact additional taxes on them, as well-known populist governments have a tendency to do.
Another reason for the downturn in French banking stocks is the large amount of the country's public debt that banks own. The prices of these government bonds have dropped since the elections, causing an increase in their yields or interest rates demanded by investors due to the perceived higher risk involved in holding the debt.
A parliament controlled by the far-right could prove challenging in terms of reducing France's massive government debt pile, currently equaling 110.6% of gross domestic product, and might even add to it. Furthermore, a deeply divided assembly would also struggle to cut the budget deficit, which reached 5.5% of GDP last year.
In comparison, UK financial markets are relatively stable, said Rudolph. The UK is preparing for its general election on July 4, with the opposition Labour Party predicted to win by a significant margin. Additionally, the subsiding uncertainty surrounding Brexit and Britain's exit from a short recession has led investors to purchase stocks in UK companies, as their low valuations compared to US stocks become more appealing.
"There are growing signs that the UK is becoming attractive among overseas investors, given its selection of stable, cash-generative companies that are inexpensive by comparison (to French stocks) for historic standards," added Richard Hunter, head of markets at Interactive Investor.
Meanwhile, the National Rally in France has promised to boost public spending and reduce VAT on electricity and fuel if they gain power. Credit ratings agencies are keeping a close watch on France, one of the EU's most indebted countries. Last month, S&P downgraded France's long-term credit score and forecasted that the budget deficit would narrow to 3.5% of GDP in 2027, significantly higher than the current government's target of 2.9%.
