French political risk will not end with April's presidential election, Citi warns

After France’s presidential election in April, the bigger test for markets will be whether the next government can secure a parliamentary majority and propose a credible plan to reduce public debt, argues Beata Manthey, Citigroup’s head of European equity strategy, in a Bloomberg TV interview. France’s political risks will therefore extend beyond the presidential vote, in her view.

“Our view is that French equities are going to be more volatile [after the April election],” Manthey said, adding that Citi believes “the situation is not going to be resolved until the summer probably.”

Despite the turbulence, Citi maintains a “neutral” stance on France and Europe as a whole in a global context, Bloomberg reports. Citi thinks much of the bad news is already priced in. Manthey noted that investor concerns about France tend to spread across markets: French bank stocks track the country’s sovereign bond spreads, with moves spilling over into broader European stock indexes. If the fiscal situation deteriorates further, wider sovereign spreads will translate directly into a deeper selloff in French bank stocks, she warned. Still, she considers it risky to short French equities at current levels, as prices will be “oscillating up and down.”

The assessment of French markets followed a weekend of protests across the country against the rising cost of living. Manthey said the unrest added another layer of complexity to an already fragile situation. The demonstrations drew more than half a million people across France before escalating into looting and arson. On Monday, French government bonds underperformed most European peers: the yield spread between French and German 10-year government bonds widened 8 basis points to 146 basis points. The euro weakened as much as 0.5%, while France’s CAC 40 index fell 1.5% versus a 0.88% decline for the pan-European Stoxx 600.