France loses top spot as Europe’s largest equity market to UK

France’s political turbulence has resulted in the nation losing its position as Europe’s largest equity market, a title it claimed from the UK less than two years ago.

President Emmanuel Macron’s unexpected announcement of a snap election triggered a significant sell-off, erasing about US$258 billion from the market capitalisation of French companies. Major banks such as Societe Generale SA, BNP Paribas SA, and Credit Agricole SA, which hold substantial amounts of government debt, saw their shares drop by more than 10% each.

Currently, French stocks are valued at approximately US$3.13 trillion, just behind the UK’s US$3.18 trillion, as per Bloomberg data. The CAC 40 Index has now lost all its gains for 2024, a stark contrast to the record highs it reached just a month ago.

A portfolio manager at Kairos Partners, Alberto Tocchio, revealed news on the volatile market.

“We are in a period where there are no certainties for three-to-four weeks and the market could unfortunately become more unstable.”

Meanwhile, factors like improving global growth and increased merger activity have rekindled investor interest in UK stocks.

Despite the UK gearing up for its own General Election on July 4, the anticipated outcome appears more stable, with the opposition Labour Party leading the polls significantly. We like UK stocks not only for valuation reasons but also as a portfolio diversifier given their attractive sector profile, as commented by Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. On top of that, the political uncertainty seems to be higher elsewhere, at least for the moment.

The FTSE 100 Index has reached all-time highs this year, driven by export-focused companies like Shell Plc and Unilever Plc. Over the past three months, it has significantly outperformed the Euro Stoxx 50 index, with Rolls-Royce Holdings Plc among the top performers.

Public finances

Globally, the UK now stands as the sixth-largest stock market. Meanwhile, market strategists in France remain hesitant about returning to equities due to uncertainties surrounding public finances and policy. In addition to banks, toll-road operators Vinci SA and Eiffage SA have suffered declines amid fears that highways could be re-nationalised if Macron’s party loses power.

This development coincides with existing pressures on France’s prominent luxury stocks, which have been affected by an uneven recovery in China. Given the unusual political conundrum currently and high headline risk between now and the election, we see no reason to rush to buy the dip stated by Barclays Plc strategist Emmanuel Cau in a recent strategy note.

The two-round vote is scheduled for June 30 and July 7. Nevertheless, investors remain cautious about the UK as well. The July 4 election is expected to be the most significant political shift since Brexit, with the incoming government facing limited fiscal flexibility and scrutiny from bond vigilantes.

Additionally, the UK stock market is contending with companies opting to list in Europe or the US, driven partly by activist investors seeking better valuations, reported Bangkok Post.