Political risks have made French stocks a prime target for short sellers in Europe

Political risks in France have reached such a level that the French stock market has become the primary target for short-selling among European and U.S. markets for some investors, Bloomberg reports, citing Barclays strategists.

According to their data, both algorithm-driven funds and funds where decisions are made by portfolio managers are increasingly shunning French stocks. The Paris Stock Exchange’s main index, the CAC 40, has been lagging behind the broader European Stoxx Europe 600 index more than at any time since 2010 and has underperformed it for the third consecutive year.

Barclays believes that the latest decline in investment in French stocks was driven by trend-following funds—Commodity Trading Advisors (CTAs). These funds take long or short positions in stock index futures based on market signals.

“CTAs have rebuilt their long positions in U.S. stocks while aggressively reducing their exposure to Europe—particularly due to political risks in France—leaving the CAC as their largest short position,” Barclays analysts Rex Fan and Anshul Gupta wrote in a note to clients. According to them, the managers of these funds hold a near-zero position in European stocks overall, while maintaining the largest possible short positions in the French index.

Volatility in the French stock market has persisted since June 2024, when President Emmanuel Macron announced early parliamentary elections. Since then, the country has had four prime ministers, and its debt and budget deficit have continued to rise, driving up refinancing costs. Recent protests against the rising cost of living have escalated into mass unrest. Amid rising risks, the yield spread between 10-year French bonds and comparable German Bunds—a key indicator of risk on French debt—has exceeded 150 basis points.

Although CAC 40 companies generate only about 16% of their revenue in France, their stocks remain caught up in the negative sentiment surrounding the country, Bloomberg notes. The market is also under pressure from weak performance in the consumer sector, which accounts for 23% of the index and includes luxury groups LVMH and Hermès International.

Fund managers who do not use algorithms are also increasingly shunning French stocks. According to a Bank of America survey published last week, France remains the least preferred equity market in Europe. The percentage of respondents planning to hold French stocks in their portfolios at a lower weighting than their benchmark weighting over the next 12 months reached a record high of 56%.

This article was AI-translated and verified by a human editor