France has turned out to be Europe's «most disliked» by investors. What is wrong with it?

Investors rushing into European equities in 2025 are practically ignoring one of the continent's largest markets - France - in preference to Germany. The French stock market has grown much more modestly than the German market since the beginning of the year, with French bonds also losing ground to their neighbors. The rapid growth is hampered by a strong decline in the luxury sector, but market participants are also concerned about much more serious issues - political and economic;

France's CAC 40 stock index is far behind Germany's DAX index in 2025: it has added only 4.1%, while stocks in Germany have risen 18% - that was their best first-half performance since 2007, wrote Bloomberg. The French market is also losing ground to the pan-European Stoxx 600 index, which is up 7% since the start of the year.

Investors' cautious attitude toward France is confirmed by a survey from Bank of America. European fund managers have become more optimistic about the region's stocks as a whole this year. But among individual countries, Germany is investors' favorite, while France is, conversely, «the least favorite,» Bloomberg reports.

- Political instability

Early elections last June left France with a «hung» parliament and political instability, which makes it difficult for the state to try to reduce the budget deficit to the limits set by the European Union, Bloomberg writes. According to Florian Allen, a fund manager at Mandarine Gestion in Paris, France's problems worrying investors are only growing.

«None of France's most serious problems have been solved in the past year. The state of public finances is deplorable, economic growth is weak, and political activity is non-existent,» Allen said. - I can well understand why a foreign investor looking to buy into Europe would prefer Germany.»

- Stocks shed premium relative to German

Shares of French large-capitalization companies have not only fallen sharply in price since President Emmanuel Macron announced early elections, but also lost a premium relative to German securities, Bloomberg writes. Now the price/earnings ratio for the CAC 40 index of French securities is 8% lower compared to the German DAX, while a decade before the early elections in 2024, French stocks were trading at an average premium of 6%, the agency notes.

In addition, French equities are lagging far behind Spanish equities, with the IBEX up 22% since the summer of 2024. In Italy, Milan's FTSE MIB index is up 14%.

- Analysts lower forecasts

Analysts are now also more cautious about the prospects of the country's most valuable companies. Since the beginning of 2024, CAC 40 earnings estimates have fallen by more than 10%, in stark contrast to the 5% rise in the DAX and the 2% increase in the Stoxx Europe 600 as a whole, the publication writes.

- An important sector is in crisis

A sharp fall in French luxury stocks has left deep scars on the Paris stock market, Bloomberg writes. Shares in luxury goods giant LVMH (which owns the Louis Vuitton and Christian Dior brands) have fallen 36% since the political turmoil began last summer. That has stripped more than 300 points off the CAC 40 rating, nearly three times the effect of automaker Stellantis NV - the second worst-performing company, Bloomberg noted.

- Bonds are also giving way

French bonds show lower yields than those of neighboring Germany. Since Macron announced the election last summer, the yield on French 30-year bonds has risen by almost half a percent, while the same rate on German bonds has remained virtually unchanged. The yield on French ten-year securities rose 18 basis points, while Germany's fell six points. Yields rise when the value of securities and, consequently, the demand for them decreases.

The bet on France was previously considered a good one, as Macron has established himself among foreign investors as a pro-business reformer and the desire of wealthy buyers to purchase French luxury goods has grown year after year, Bloomberg noted.

The total return for the CAC 40 index from mid-2017, when Macron became president, to June 2024, when he dissolved the National Assembly, was 83%, compared to 68% for the pan-European Stoxx 600 index. By comparison, since June 2024, the CAC 40 index has fallen 4%, while Frankfurt's DAX has risen 26% and the pan-European Stoxx 600 has added 3.6%.

«There's no real way back for France in terms of going back to the spreads it was trading at before,» said John Taylor, head of European fixed income and director of global multisector at AllianceBernstein, which manages $785 billion in assets. But the longer the country lacks a clear governing majority, the harder it will be to improve the country's debt and fiscal dynamics, he said.

While France's budget deficit has been widening for years, last summer's early elections produced a badly fractured parliament, making it clear how difficult it is to cut government spending, Bloomberg writes.

Prime Minister Francois Bayrou plans to unveil his government's budget plans for 2026 next month. They envision savings of about 40 billion euros ($46 billion).

«If Bayre succeeds in implementing the 2026 budget, I would become optimistic about France,» said Arnaud Giraud, head of economics and multi-activity strategy at Kepler Cheuvreux in Paris. - But that would only be a tactical bet, as political risk will return sooner rather than later.»