TS Lombard goes long French stocks
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TS LOMBARD GOES LONG FRENCH STOCKS
Strategists at TS Lombard have added a long French equities position to their macro strategy portfolio, as they expect a decline in French political-risk premium.
A slow recovery in French assets has failed to fully materialise since the second round of the French election, even as worst-case scenarios for markets, a far-left or far-right majority, were ruled out.
France's CAC 40 .FCHI is still down 5.1% since Macron called the election on June 9, while the mid-cap CAC Mid 60 .CACMD is down 6.3%. The broader STOXX 600 .STOXX is just 1.2% below where it was back then.
The country's three largest lenders - Credit Agricole CAGR.PA, Societe Generale SOGN.PA and BNP Paribas BNPP.PA - are down between 4.3%-7.8%, compared with a 0.8% gain in the STOXX banking index in that time .SX7P.
And even though the country remains in deep political crisis with no obvious choice for government, TS Lombard still expects a recovery in French equities.
"Although political uncertainty remains, we believe that some of the derating French equities has suffered will be undone," TS Lombard head of research Andrea Cicione says.
"Looking beyond the immediate political uncertainty, the sectoral composition of French equities is appealing."
"Industrial should benefit from the investment push we anticipate over the next few years and consumer discretionary from a positive cyclical outlook."
Cicione still expects the bond market to retain its political risk premium, however. The spread between German and French 10-year yields DE10FR10=RR, at around 65 bps, is about 15 bps wider than where it was before June 9, although remains below widest levels hit before the first round of voting, around 85 bps.
"A compromise, or caretaker government, will find it difficult to push through policies aimed at more fiscal restraint," TS Lombard says.
"For this reason, we expect the repricing that has taken place in French bonds to be “sticky”."
(Samuel Indyk)
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French assets lag since election announcement https://reut.rs/3zKDfuy
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